Private Mortgage Insurance is a Pain, But Not Necessarily Evil
New homebuyers who find themselves paying the added cost for lender mortgage insurance may feel like some kind of devil is attaching itself to their wallet, but the logic behind private mortgage insurance is not so dramatic.
PMI is a charge placed on a homebuyer through the mortgage process for the first few years of the mortgage. It is a one-time expense but it may seem like it hits month-to-month. This is because when a home loan is first initiated with default coverage, the extra charge continues until the loan amount is paid down by at least a minimum percentage amount. In some cases, buyers can avoid the insurance charge altogether by paying enough of a downpayment that the fee is not required. This is typically 20 percent of the house cost.
However, many first-time buyers don’t have 20 percent of a house cost in ready cash. A significant number are only able to provide a five percent downpayment. To make sure the lender is not stuck with a fickle borrower, the private mortgage insurance is charged as a safety net for the lender. It provides for an insurance plan that pays the lender if the loan is defaulted.
Critics argue the home itself is already the collateral for the loan and PMI is not necessary to protect a lender. However, the 2008 real estate crash proved the opposite. It is true when a house appreciates in value it can pay off a loan completely if sold in foreclosure. However, if the value drops as many home values did at the end of the decade, the lender loses both the loan and collateral value. PMI provides an alternative for lender recovery in such instances.
Without loan insurance coverage, many home lenders would not want to take on the risk of homebuyers who only put down five percent or less. The loss potential is too great on the loan provided. As a result, the insurance helps such sales go through where otherwise the lender wouldn’t want to take on the associated risk.
Private mortgage insurance coverage is generally at the discretion of the lender, and some choose not to apply it. For Federal Housing Authority home loans, a mortgage insurance premium is required to help the government offset lending risk. It is different than lender mortgage insurance but serves the same recovery purpose. This charge can be split as an up-front hit during purchase as well as an ongoing monthly charge. Conventional loan insurance, on the other hand, is applied by lenders over the life of the loan until the owner’s equity reaches 20 percent in the property. Thanks for stopping and you can click here for mortgage pre-approval