Private Mortgage Insurance

Private mortgage insurance is a type of insurance that protects a mortgage lender against losses incurred if they have to foreclose on a mortgage.

Private mortgage insurance allows borrowers to get a mortgage with much less than the traditional 20% required by lenders. With private mortgage insurance a borrower can obtain a mortgage with as little as 3% down. As it takes about ten years to save up a 20% down payment and with housing prices increasing at a rapid rate private mortgage insurance allows you to enjoy home ownership much sooner than would be possible without it.

Private mortgage insurance is based on the size pf the mortgage and the amount of the down payment the purchaser makes. There is no penalty for a borrower having a poor credit rating or risk of them defaulting. The premium charged is typically about one half a percent of the loan value. For example, on a $200,000 mortgage the premium would $1,000 a year or $83 a month.

Private mortgage insurance is a requirement for anyone who owes more than 80% of the equity of the home. Note that it is equity that is looked at not the mortgage size. Thus, if you repaired a fixer-upper or bought a house in an area that saw house values appreciate rapidly you may have reached the point where you have reached the 20% equity point much sooner than you thought. If this is the case you can drop the private mortgage insurance and save yourself the premium cost.

Keep track of the size of your mortgage and real estate values in your area. If your equity increases beyond the 20% point apply to have the private mortgage insurance cancelled. Even if you have to pay for an appraisal it will soon pay for itself especially if the mortgage is fairly large.

Some borrowers (for example, those with a bad credit history who are considered a higher risk) have to keep private mortgage insurance coverage until their equity in the house reaches 50%.

There are ways to avoid paying for private mortgage insurance. The most common involve:

• Paying the lender a higher interest rate on the loan to compensate them for the additional risk. The lender usually wants to increase the interest to about the same as the insurance premium would cost so the payments are almost the same. However, the payment is an interest payment and as such qualifies as a tax deduction.
• Obtaining a second mortgage (sometime called a piggyback loan) to keep the principal mortgage below the 80% threshold. For example a lender may offer something like a “80-10-10” loan. In this type of loan the borrower puts 10% of the price as a down payment, borrows 10% of the price as a second mortgage and the remaining 80% is the principal mortgage. There is a premium charged on the interest paid on the second mortgage but often the amount it is less than the borrower would pay for the insurance premium. Also the interest payments are tax deductible while insurance payments are not.