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Private Mortgage Insurance

Private Mortgage Insurance, or PMI, is a type of insurance that some borrowers are required to obtain. Its main purpose? To protect the bank in a default situation. Without this added layer of protection for the bank, lenders would be far less likely to lend money at competitive interest rates. PMI is typically reserved for those who have less than 20 percent to put down, or who are considered to be high-risk borrowers.

If at all possible, try to avoid PMI. Borrow your down payment or consider taking out a second mortgage. As PMI does not contribute to your equity or benefit you in any way, you’ll want to explore all the possibilities that are available when it comes to bypassing it altogether.

Already have PMI? It can be removed from your mortgage once you reach 20 percent in equity, so now is the time to take steps toward that goal. Once you have your 20 percent, you can refinance without PMI while keeping your low-interest rate!

What Determines the Rate of Private Mortgage Insurance?

When calculating PMI, two main areas are looked at: the loan type and the amount of the down payment. That means that private mortgage insurance rates will be different on a 10-year loan versus a 30-year loan. Should it be determined that you need PMI, take the time needed to carefully review the rates and be sure to ask clarifying questions so you know exactly what you’re getting yourself into.

PMI Calculator

If you think you’ll end up with PMI, be sure to take advantage of various online tools, like a calculator. With help from a PMI calculator, you can better understand the effects that PMI will have on your bottom line.

What will you need when making use of a private mortgage insurance calculator? Answers to the following:

  • 1. The purchase price of the property
  • 2. Your down payment amount
  • 3. The loan term

The calculator will then provide some PMI clarity!

Tips on Avoiding Private Mortgage Insurance

Tip 1: Piggyback mortgage loans. Many people take out a second mortgage to help cover expenses. Some may see this as intimidating but with two mortgages, you’re adding to your home equity as you pay it back, rather than simply losing out on that money when it is in the form of PMI payments.

Tip 2: Purchase a home you can afford, one that you’re able to put 20 percent down on.

Tip 3: Borrow your down payment. If you don’t have the needed 20 percent, consider borrowing it. Many turn to friends or family to hit their down payment goal, as it’s a better route than having to obtain PMI. Plus, a family member is more likely to give you a competitive interest rate, if they require one at all!

How to Eliminate PMI

The sooner you hit the twenty percent equity point, the sooner you can get rid of your private mortgage insurance. So what are the best and fastest ways to do that?

  • Put extra money towards your principal every month
  • Make home improvements to raise the value of your home, as well as your equity
  • Monitor home values in your area and get an updated appraisal if values are increasing - that updated appraisal may convince the lender to remove PMI
  • Carefully keep track of your payments so you know when you have 20 percent equity in your home
  • Consider your refinancing options

Shop Around For PMI Rates

If you can’t avoid private mortgage insurance, shop around so you can be sure you’re getting the best rate possible. Lenders should be able to provide you with rates that you can compare to the others you obtain. Don’t hesitate to ask questions throughout this entire process, and inquire about lowering any quotes that you do get. You won’t know if you can get something better if you don’t ask!