A Guide To Private Mortgage Insurance
When we are buying a home, we usually end up dealing with experts who keep throwing numbers and figures at our faces that we do not have an idea or knowledge about.
It has been seen that most home buyers end up accepting the loan that they have been approved for rather than taking time to negotiate on the terms and save themselves money in the long run.
Though it is not always necessary, but the most common cost that home buyers end up bearing is the Private Mortgage Insurance or PMI.
A PMI is a type of protection money that a buyer pays on the house he purchases. It is not meant to protect the buyer though. A PMI protects the lender that gives the buyer the mortgage loan to purchase the house.
When you buy a home with a mortgage, the lender expects you repay the loan amount along with the interest and for some reason if you should lose your source of income and are unable to repay the mortgage, the lender would foreclose and sell your home to recover his money. So to avoid losing more money, the PMI helps to pay the cost incurred by the lender during foreclosure procedures.
It is because of the risk involved that the entire responsibility is assigned to the borrower and hence the PMI. If the mortgage is for more than 80 percent of the appraised value of a home, there is an increased risk to the lender as he will not receive the full repayment of the mortgage amount.
Earlier a home buyer had to put down 20 percent of the appraised value of a home in order to get a mortgage. With changing economy, today mortgage companies are giving 100 percent finance and if you opt for this type of financing, you would usually end up paying PMI. Therefore, it is in your best interest to structure your mortgage in such a way that you have affordable payments every month. It, obviously, is beneficial for you if you can put down 20 percent down payment as you would not be required to pay PMI.
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