Private Mortgage Insurance

If your down payment is less than 20% of the purchase value of the home, then your lender will likely insist that you get private mortgage insurance or PMI. The purpose of PMI is that it protects the lender in case you default on your loan payments. The insurance itself will be purchased by you. The amount of PMI will depend on what type of loan you have, adjustable rate mortgages tend to have higher insurance premiums than fixed rate mortgages. Also borrowing more money leads to higher insurance premiums as well. In general the higher the Loan to Value ratio is the higher PMI will be. The Loan to Value ratio is as follows:

Loan to Value ratio = Loan amount / Market Value of House

Something to keep in mind is that PMI payments are not tax deductible. However, PMI is not permanent it can be discontinued when 20% equity is reached in the home. Recall that equity is

Equity = Market Value - What is owed

The increase to 20% can come from a variety of sources, some of these are:

  • increasing property values
  • paying down the loan
  • home improvements

The cost of getting PMI varies frequently so you should consult your lender about the specifics of PMI for your loan.

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