Articles About Finance And Refinancing

Private Mortgage Insurance - Will You Need It?

If you are considering the purchase of a new home, try to have as much money as possible for your down payment. While it is true that you can obtain a mortgage with as little as five to ten percent down, and even with zero money down, ideally; you would like to have at least twenty percent of the purchase price for your down payment.

Should the cash available for your down payment be less than twenty percent of the sale price, you will be required to obtain private mortgage insurance (PMI) from your lender. The purpose of PMI is to protect the lender should you default on your mortgage loan.

What is the cost of private mortgage insurance? The cost will vary depending on the lender, the amount of the mortgage loan, and the size of your down payment. In most cases, you will find the charge for PMI to equal about one-half of one percent of the money borrowed.

Here's an example, lets say you purchased a home for $300,000 and put down a ten percent down payment of $30,000. The mortgage amount would be $270,000. The lender would calculate your PMI charge by multiplying $270,000 by 0.005. The result would be an annual PMI charge of $1350. This charge would add an additional $112.50 to your monthly mortgage payment.

Unlike the interest paid on your mortgage, charges for PMI are not tax-deductible.

You will have to continue paying for private mortgage insurance until the equity in the home exceeds twenty percent. It certain economic conditions it could take years to pay down the principal enough to get rid of the PMI. However, in a market where housing prices are rapidly increasing, it will happen a lot faster. Should the value of your home appreciate enough to cause your equity to exceed twenty percent, you can have the charges for private mortgage insurance dropped. In order to prove this, you may have to pay to have your home appraised which will show that the home's value has increased. This home appraisal may cost a few hundred dollars, but this expense will be recovered quickly by having your monthly payment reduced.

If you are unable to make a twenty percent down payment, is there any way to avoid having to pay PMI? Yes, you will have a couple of options.

The first is called a "80-10-10" mortgage. This involves taking out two mortgages. The first mortgage will be for 80 percent of the sales price, and the second mortgage would be for 10 percent. The remaining 10 percent represents your down payment.

In this case, the second mortgage would have a slightly higher interest rate. But since this higher interest rate is applied to a smaller amount, it is still less expensive than paying one large mortgage with PMI. Also, you receive added savings because the interest is all tax deductible.

Your second mortgage option to avoid paying PMI would be to pay a higher interest rate. Many lenders will gladly waive the private mortgage insurance should you agree to pay a higher interest rate until your equity exceeds twenty percent. After reaching the twenty percent mark, your interest rate would be lowered.

The initial higher interest rate will usually range from 0.5 to 1 percentage point. Again, the higher the down payment, the lower the interest rate increase. Here again, you will have the advantage of the added interest being tax deductible.

Carl DiNello is an Article Author, Researcher, and Wesbite Owner whose articles are featured on websites covering the Internets most popular topics.

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