LESSON 8: PRIVATE MORTGAGE INSURANCE
One of the things many first-time home buyers
and those without much savings have to deal with is private
mortgage insurance, or PMI for
short. If your down payment is less than 20 percent of the home's
sale price, you typically must get PMI because you're considered
a higher-risk borrower.
If your down payment is less than 20
percent, you'll most likely have to get private mortgage insurance.
The coverage protects
lenders against default.
If a borrower stops paying on a mortgage,
the insurance company ensures that the
lender will be paid in full. Mortgage
companies pick insurance providers for
their customers, but the borrowers have
to foot the bill. Usually, they do so
in monthly installments. But some lenders
offer programs whereby the borrower pays
the entire insurance premium in a lump
sum at closing.
PMI charges vary depending on the size of the down payment and
the loan, but they typically amount to about one-half of one
percent of the loan.
Let's say you put down 10 percent, or $10,000,
on a $100,000 house. The lender multiplies the 90 percent loan,
or $90,000, by .005. The result is an annual PMI premium of
$450, which is divided into 12 monthly payments of $37.50.
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