Personal Mortgage Insurance: A General Guide

There are certainly plenty of costs associated with buying a new home, and if you are purchasing a home -- and making a down payment less than the standard 20 percent that is normally required -- you can expect the added expense of personal mortgage insurance to increase your costs even further, better known in many circles as PMI.

Why You Have to Purchase Personal Mortgage Insurance

In order to protect themselves, and their investment, most banks or lenders will require home buyers to purchase, and pay for, personal mortgage insurance, if you are borrowing more than 80 percent of the home’s value at the time of purchase. Quite simply, if your down payment is less than 20 percent, then you should expect to be required to purchase personal mortgage insurance.

What Are the Benefits of Personal Mortgage Insurance

While personal mortgage insurance is designed to protect the lender, in the event you default on your loan, it does offer benefits to home buyers as well. Personal mortgage insurance enables many people to purchase a home - when they otherwise would not be able to. Historically, people that have purchased homes, with less than the normal 20 percent down payment, actually go into default on their home mortgages - much more often than people that have paid the standard 20 percent down payment. Therefore, lenders use PMI to protect themselves.

How Long You Need to Carry Personal Mortgage Insurance

Personal mortgage insurance allows first-time homebuyers to purchase a new home, without having first to save thousands of dollars to apply as a down payment. Also, once your mortgage is paid down to the point where the loan balance is less than 80 percent of the home’s appraised value, at the time of the original purchase, you are no longer required to carry personal mortgage insurance and can cancel it.

Since most borrowers don't know when their loan balance has reached a level that allows for PMI cancellation, federal laws have been passed to require the lender to automatically cancel personal mortgage insurance once your loan meets these requirements. In addition, to your loan balance having fallen below the 80 percent threshold -- in relation to your home’s value at the time of purchase -- you must also be current, and not late, on your monthly mortgage payments. In the event you are late on your mortgage payments, your PMI will not be canceled until you have brought all payments current.

How You Can Avoid Paying for Personal Mortgage Insurance

Obviously, the easiest way to avoid paying for personal mortgage insurance -- is to wait until you can afford the standard 20 percent down payment. Saving until you have a larger down payment will also ensure that you have equity in your home the moment you sign the loan documents. However, if you need to move into a home soon -- or if trying to save a substantial down payment is significantly burdensome -- then personal mortgage insurance can help you move into a new home fairly quickly.

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