By Briana Frazier
A Guide for Homeowners: What is private mortgage insurance?
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eing able to put down a down payment is difficult and you are not alone. According to a 2017 survey conducted by the Urban Institute, at least 53% of Americans cited the difficulty in saving for a down payment as the number one barrier to homeownership-something that makes the dream of owning a home just that, a dream. It is important first to understand why banks require a down payment. For banks, lending to individuals is risky. If a person defaults on the loan for whatever reason, the bank will take the brunt of this financial loss. The banks, therefore, need the homebuyer to prove their financial commitment to the loan. Additionally, it shows that the home buyer can comfortably make monthly mortgage payments. But all this is dependent on how much a homebuyer puts down. FHA loans require as low as 3.5 percent of the total loans. As low as this may seem, it does attract an additional fee, the Private Mortgage Insurance (PMI). WWW.THEPOWERISNOW.COM
WHAT IS PRIVATE MORTGAGE INSURANCE? Private mortgage insurance is also referred to as lender’s mortgage insurance. It is an insurance policy that a homebuyer must purchase if they cannot put at least 20 percent of the loan as a down payment. It is usually a condition of a conventional mortgage loan. The 20% rule is based on the mortgage’s loanto-value (LTV) ratio. The higher the ratio, the higher the risk for the lender. Therefore, putting down anything less than 20 percent, the ratio is significantly higher and will need additional coverage. The PMI, though purchased by the homebuyer, protects the lender’s investment. WHAT DETERMINES THE PMI? The costs associated with PMI range from 0.25 percent to 2 percent of the home buyer’s loan balance. The rate at which the homebuyer will be charged is dependent on three things. The loan size and the homebuyer’s credit score will be put into l
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