Private Mortgage Insurance (PMI)
When you are working on your estimated mortgage payements as a buyer you may see something called PMI or Private Mortgage Insurance and have no idea what that is. Its an insurance policy to help if the payments are missed…..but it doesn’t cover who you may think. Let’s dive a little deeper…..
Worst Case Scenario
If you were to default on your loan the bank is going to begin the foreclosure process. The lender is in need of of enough room in the amount owed vs the amount they can get for the foreclosed home. Once the property is a bank owned property you may see it advertised as REO property.
Loan to Value
Until your loan to value reaches 80:20 you will be required to maintain that PMI payment as part of your regular monthly payments. It can be expensive, particularly when you factor in part of your monthly payment doesn’t impact your equity.
This is one of the reasons consumer advocates suggest having a 20% down paymebnt before purchasing a home. With prices soaring and rising rapidly, this has become very difficult for young and first time buyers. There’s a delicate balance of finances when deciding whats a better trade off….
So why do I need PMI
The PMI covers the lender, not you. If you owe more than 80% of the homes value, the bank has taken on additional risk. Should the home become an REO property they could be stuck with your property a long time while trying to clear it off their books.
If prices were to fluctuate, the property you owe 200k may not be able to be sold at that price. The lenders risk is real with REO and thats what the PMI is for and it covers the LENDER not the borrower.
Another consideration
As you are shopping loans, something to consider would be if the PMI can be dropped when you hit the 80% LTV. You may have to pay for the appraisal, but the return on the investment should be worth it if you are planning on staying at the house for a few years. The 80:20 rule is something to surely look at as values begin to reset due to interest rates and the market cooling.
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Chris Whitehurst
Rose and Womble Real Estate
252 312 2263