Principal Mortgage Insurance: Pros And Cons

Principal mortgage insurance goes by many names; it is often referred to as lender mortgage insurance, private mortgage insurance, personal mortgage insurance, and the list goes on. However, it is most commonly referred to simply as: PMI. When you purchase a home, and your down payment is less than the standard 20% that is normally required, most lenders will require you to purchase PMI.

PMI is simply a type of insurance that your lender takes out to ensure against the possibility of you not being able to make your mortgage payments or defaulting on your home mortgage loan. At face value, personal principal mortgage insurance sounds like a pretty good idea; in the event you can't pay your mortgage - PMI pays it for you. However, there are a few things you should know about principal mortgage insurance, so that you're better informed:

The Benefits of Principal Mortgage Insurance

In the event you're not able to continue to make your monthly mortgage payments, or if you otherwise default on your mortgage, then the insurance company pays the lender an amounts that is equal between the amount a foreclosed home is sold for at auction and the actual balance of the loan. Therefore, if you're not able to make your mortgage payments - the lender doesn't get stiffed.

Principal mortgage insurance allows you to purchase a home - even if you don't have a large down payment. Traditional loan homes required that a buyer be able to put up a 20% down payment; this usually required potential homeowners to save for years and years: in order to save the amount needed for a 20% down payment. By insuring against default, and loss of the lender's investment, PMI allows you to purchase a home with little or nothing as a down payment.

As you can see, the advantages of principal mortgage insurance are considerable and cannot be denied. The lender is assured of payment, and you get to move into a new home - without a lot of money out of pocket. But, there are other things to consider:

The Costs of Principal Mortgage Insurance

Principal mortgage insurance is expensive, and you usually have to pay for it. Although the lender is the one who gets paid if you can't make your mortgage payments - you are the one who bears the brunt of actually paying for the coverage. Depending on the value of your home, and how much of a down payment you make, principal mortgage insurance can range from a few hundred dollars to thousands of dollars. You will generally have the option of paying all of that up front, or simply add the amount into the balance of your loan. PMI can add substantially to your monthly mortgage payment.

You may be required to carry principal mortgage insurance for many years, depending on the value of your home and how much of a down payment you make. Lenders are not required to release you from your obligation to them, to carry a PMI policy, until your loan balance reaches 80% of the purchase price of your home, or the appraised value of your home at the time of purchase - whichever is less. Therefore, it can take quite a while - years, in fact.

So, after looking at these points, PMI does not seem as attractive as it did before. However, if you don't have a lot of money to make a down payment with, PMI is something you’ll just have to live with. Or, you could consider letting the lender pay the PMI cost for you. They actually do this sometimes; however, it generally results in much higher interest rates -- so, you shouldn’t really consider it.

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