Define Private Mortgage Insurance

by Leann Harms, Demand Media
    Private mortgage insurance enables you to become a homeowner sooner than you might think.

    Private mortgage insurance enables you to become a homeowner sooner than you might think.

    If you’ve been thinking about upgrading your status from renter to homeowner, you’ll need to do your homework to determine how much you can comfortably afford to spend each month for a house payment and how much of a down payment you’ll need to reach that goal. If you just can’t wait until you have enough to put down, you’ll need private mortgage insurance, also known as PMI.

    Basics

    In most cases, lenders will require you to pay for PMI if the total amount of your home loan is equal to more than 80 percent of the appraised value of your home. In other words, you need to come up with a 20 percent down payment to avoid paying PMI. The more you have to borrow, the bigger the risk lenders are taking with you, and PMI protects lenders if you default on the loan.

    Advantages

    PMI is primarily beneficial to lenders because of the protection it offers them, but it can be helpful to first-time homebuyers too. If you’re eager to become a homeowner, it can reduce the wait time and enable you to buy a home without waiting until you’ve saved up a lot of cash. You can also deduct your mortgage insurance premiums when you file your taxes, although you’ll need to itemize your deductions.

    Cost

    The biggest drawback to PMI is the cost. If you’re budgeting for a house payment that doesn’t include enough of a down payment, you’ll need to factor in the cost of PMI, which will be included in your house payment unless you make arrangements to pay for it up-front.
    The average cost of annual PMI premiums ranges from one-half of 1 percent up to 1 percent of the total loan amount. For example, if you're able to come up with a 5 percent down payment on a $200,000 house, the remaining balance is $190,000. This means that your annual PMI premiums will range from $950 to $1,900, which averages out to an extra $79 to $158 a month.

    Canceling PMI

    The most important thing to remember is that once you’ve achieved 20 percent equity in your home, you need to stop paying for PMI. In the past, homeowners were entirely responsible for knowing when they had reached enough equity that they could cancel their PMI. The Homeowners Protection Act of 1998 established parameters for automatic termination of PMI. Certain guidelines, including consistently making payments on time, must be met.

    About the Author

    Based in South Florida, Leann Harms has been writing since 2008. Her design, technology, business and entertainment articles have appeared in "Design Trade" magazine and Web sites including eHow. Harms has a Bachelor of Arts in English from Florida Atlantic University.

    Photo Credits

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