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Private Mortgage Insurance for low down payment loan

Posted on: 30th Mar, 2004 11:12 pm
Private mortgage insurance (PMI) is an amount paid by a private insurance company to a lender in order to prevent losses, in case a borrower defaults on his mortgage payments. When a borrower pays less than 20% of the appraised value or sale price as the down payment on a house, he is required to pay the costs of this insurance. In other words, if the ratio of the loan offered and the appraised value of the property, that is, the loan-to-value ratio or ltv ratio is more than 80%, then a borrower has to pay for private mortgage insurance.

For example
, Sarah wants to buy a house of $1,00,000. She takes a mortgage loan of $90,000 from David. Since the loan value is 90% of the property value and the down payment is only 10%, so she will have to pay for private mortgage insurance. In case she fails to make monthly payments in time, the insurance will pay David on behalf of Sarah.

  • The PMI charges depend on the amount of down payment and loan to value ratio.

  • The mortgage insurance premiums are tax-deductible.

  • A part of the private mortgage insurance premium is paid at closing and the rest is included in the monthly mortgage payment.

  • A borrower has to pay these insurance premiums until the home equity increases to 80% of the property value. But in case of mortgages insured by the Federal Housing Administration, the private mortgage insurance is to be paid throughout the loan term.
  • Private mortgage insurance helps a borrower to take a mortgage with a down payment as low as 3% or 5%.

  • It helps lenders from losses in case the borrower fails to make monthly payments on the mortgage.
Most of the mortgages require the payment of mortgage insurance premiums but there are some conditions under which a borrower may get rid off it. One way of doing it is to accept higher interest rates or make a down payment of 10% of the appraised property-value along with a first mortgage of 80% of the appraised value and a second mortgage for the remaining 10%.

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Eric is correct. Your payment will be higher due to PMI and higher interest.
Posted on: 05th May, 2009 04:26 pm
Posted on: 27th Jan, 2010 12:58 pm
sidney, private mortgage insurance has nothing to do with mortgage life insurance. if there was mortgage life insurance on the debt, then a claim would need to be filed with that insurance company in order for the loan to be paid in full.

as for foreclosure, if there was a default on the loan, then presumably the life insurance benefit, if any, may have been defaulted on as well. typically, that's paid for along with the loan payment, so if payments cease on the loan, the insurance company will cancel its policy.

i think you've got some homework to do, frankly. perhaps the lender can assist you, though they're probably not all that helpful once a loan has gone into default.
Posted on: 27th Jan, 2010 01:02 pm
Very simple...what is cheaper the pmi or the rolling over of the 20%. Short and long term scenarios
Posted on: 18th Aug, 2011 09:47 am
I personally feel that rolling over 20% as down payment is a better option. If you go for pmi, you will have to pay extra money towards it!
Posted on: 18th Aug, 2011 10:50 pm
If you can afford to put 20 per cent down on a home, that's always a better idea. It provides equity right away, which is protective in an environment that we've started to become accustomed to, where values drop and seem never to cease doing so.
Posted on: 21st Aug, 2011 03:10 pm
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