Private Mortgage Insurance

Private Mortgage Insurance can be a costly part of your monthly payment.

Take a close look at your mortgage statement and you’ll see a breakdown of the items that ultimately determine your monthly mortgage payment. In addition to the principal and interest portion of your payment, as well as escrow installments that go toward your property taxes and homeowner’s insurance, you might notice an item called PMI.

That’s Private Mortgage Insurance, a sometimes misunderstood – even forgotten – part of a homeowner’s monthly mortgage payment. But for somebody who’s been in a home for a number of years, or somebody considering purchasing a home, it’s worth taking a few minutes to fully comprehend what PMI is and how it works.

What is PMI?

Essentially, PMI serves two purposes. First, it provides a safety net for lenders, safe-guarding them against borrowers who make a down payment of less than 20 percent and then default on a loan. And second, it spares home buyers of the need to save such a large down payment before purchasing property is a possibility.

If a borrower buys a home with, for example, a 5-percent down payment, PMI is likely to be a part of his or her mortgage payment for years. Since the cost of PMI is typically between $100 and $150 per month, over the course of months and years it can become an expensive part of a home purchase investment. And often, after months and years, it becomes a forgotten part of a monthly payment. But it’s worth monitoring.

Should you still be paying PMI?

Consider this scenario: The Smiths bought a home seven years ago for $200,000. Their down payment of $10,000 left them with a $190,000, and since they only put 5 percent down, their monthly mortgage payments ever since have include a $110 PMI payment. After seven years, they’ve paid $9,240 in PMI.

Currently, the Smiths loan balance is at $155,000. That’s 81.5 percent of the original loan. A little math will tell them that when their balance gets under $152,000, they break the 80 percent mark and can request to have PMI canceled, saving them $110 per month. Given that, it might make sense for them to consider making a large payment against their principal if possible to bring the loan amount lower, saving them in the long run.

The Smiths, however, do want to look at how the market has affected the value of their home. Lenders can take into consideration a drop in the property value, as well as the Smith’s payment history, when determining whether Private Mortgage Insurance can be terminated.

Justin Velthoen of Toucan Homes is a real estate professional. The content presented above should not be considered tax or legal advice, and is intended only to assist homeowners in finding general answers to their questions. Toucan Homes recommends that homeowners seek professional tax and legal advice from a licensed lawyer and/or CPA.

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