PMI

As anyone who watches the news can figure out, the american home mortgage market is in shambles. Due to unsavory lending practices and home buyers that took out not so smart loans, the real estate market has been in a serious slump. There is a small, glimmering piece of hope. The numbers of new home buyers are starting to perk up a bit and the economy was not hit as hard as originally predicted. If you have ever been interested in owning your own home, now might be a good time. There are certain pieces of information that you should be aware of before starting your journey down home ownership. What a PMI is and how it can effect your mortgage payments, is one of those pieces of information.

The initials PMI stand for private mortgage insurance. A PMI is mainly used for people that can only place a down payment on a home loan of less than twenty percent. This insurance is to protect the lender in the case of a default on the loan. If a person taking out a loan were to default and they didn't have this insurance to back them up, then the risk to the lender would increase greatly since that cash is usually given out right at the time of the home purchase.

Each PMI amount is determined by a case by case basis. The creditworthiness of the person taking out the loan plays a huge role in how much the annual payments will be. The insurance is paid for in monthly installments. The usual amount of the insurance that you must pay each year is half of one percent of the total amount of the loan. After that is calculated it is then broken down into monthly payments. For most people purchasing a home, these monthly payments are pretty manageable and will not add up to a big percentage of their income.

There are ways that you can avoid paying for private mortgage insurance. The first way is to of course pay more than the twenty percent that is required to take out a mortgage loan. This is the simplest way to avoid paying a PMI. Another way to avoid paying the PMI is if you accept a higher interest rate on your mortgage payments. Depending on how long you take in paying back your loan, this can end up being more costly than the PMI. A third way that you can avoid paying the extra charge is to take out what is known as a 80-10-10 loan. Without going too much into detail, this entails taking out two different loans and a ten percent down payment. Depending on your financial situation, each one of these options can work out to your advantage. It is up to you to decide which one is best for you.

As you see, the private mortgage insurance plays a big role in you purchasing a home loan. It is best to check your personal finances and see how you want to handle the process.