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.
Return from Private Mortgage Insurance to What's a Mortgage?