Examining the Pros & Cons of Private Mortgage Insurance

What Is Private Mortgage Insurance (PMI)

Private mortgage insurance (also referred to as PMI) is a policy which protects lenders against non-payments, in the event that borrowers default on their loan. The main purpose of obtaining PMI is to protect lenders, it doesn’t protect the buyer at all. Buyers pay a premium on PMI, so that in the event that they default on their mortgage, lenders are protected. Many lenders require PMI insurance to be purchased, especially in today’s economy and housing market, where so many borrowers are defaulting on their mortgages and loans. The PMI offers lenders the security of knowing that they will be protected in the event that the borrower is not able to keep up with mortgage payments, and defaults. The only benefit of private mortgage insurance for borrowers is that it lowers the down payment amount borrowers must initially pay.

The cost of PMI will vary, however the typical premium payments are between 1/2 – 1% of the total loan amount, but this is dependant on the initial down payment which borrowers put down. Also, unlike mortgage premiums on a typical loan on a home, PMI premiums might not be tax deductible to borrowers; basically borrowers are paying out of pocket, and in most cases won’t see a cent of it come back to them around tax time. Additionally, your credit has no bearing on your payments on a PMI premium. So whether you have the cleanest credit record out there, or your credit rating is well below the average score, if you have a home which cost the same, and you both put down the same down payment, you will be making the same premium payments on your PMI premiums.

Pros of carrying a Private Mortgage Insurance

There are a few pluses to obtaining private mortgage insurance from the borrower’s standpoint. The initial down payment on a home is typically 20% of the entire purchase price. However, if you have a PMI loan, you can put as little as 0 -5% down at the time of closing, for the same home. That means, less out of pocket expenses initially. This allows many consumers who would otherwise not be able to be homeowners in today’s marketplace, become homeowners, at a much lower cost.

Another pro of these PMI loans is that they do not underwrite it’s premium rates based on the borrowers credit and their potential risk for default. Therefore, any borrower can get a PMI loan, even if they have horrible credit, and might be a very default candidate, these consumers are still able to obtain a PMI loan. And, no matter what your credit score, individuals with PMI loans who purchase a home with the same price and put down the same amount as a down payment, will pay the same monthly rates on their PMI loans.

Cons of Private Mortgage Insurance

There are many cons about having to obtain a PMI loan as well. In many, if not most, instances they borrower is not the one asking for the PMI loan, but the lender is requiring it otherwise they will not make the loan. Another con is the added monthly premium, which you would otherwise not have through the use of a purely traditional mortgage loan. Additionally, these PMI loans are very difficult to cancel; you must reach an 80/20% loan-to-value ratio before being released from this PMI loan.

The concept of a PMI loan is extremely favorable to lenders. It offers a security in the event that a borrower defaults. It also has the plus side to potential homeowners who do not have the typical 20% down payment. Whether you like or dislike PMI loans, they are very common in today’s marketplace, and will probably continue in popularity until the market steadies out again.