Personal Mortgage Insurance and the New Homebuyer
Buying your first home can be overwhelming. Not only are you making a large financial commitment for the long term, there are upfront costs such as a house inspection that require cash. The costs involved in buying a new home can quickly use up the down payment you have saved, leaving you with less than twenty percent of the principal to put down on your new mortgage loan.
Personal Mortgage Insurance, otherwise known as PMI, is insurance that protects the lender should you default on your loan. Generally, if you borrow more than 80% of the value of your new home with a mortgage, or reversely, have a down payment that is less than 20% of the purchase price, you must purchase PMI as security for your lender.
PMI premiums can be expensive. Usually, the first year’s premium is due in one lump sum upon your purchase of a new home. A monthly premium is then added to the mortgage payment to continue your PMI policy without lapses in coverage. Should you default on your mortgage, it is important to know that your PMI coverage does not benefit you, only the lender of your mortgage.
Once you have acquired 20% of equity in your home, you can drop your PMI insurance. You must have your home’s value reassessed and if you own more than 20%, you no longer need to have a PMI policy. Submit your home’s reassessment to your Mortgage Company and insurance company, letting them know that you no longer need PMI coverage.
Sometimes lenders will circumvent the need for PMI coverage by offering a second mortgage, generally at a higher percentage than the first mortgage. You will have one loan for 80% of the value of your home and a second loan for 20% of the value. In the long run, this may be a more expensive option for the homebuyers as the loan may take many years to pay off.
Whatever you choose, either obtaining a PMI premium or having two mortgages, buying a new house will be an expensive but worthwhile undertaking. Know that you do not have protection under your PMI premium but that if you should default on your loan, your mortgage company will be paid.
JM Aziali