Private Mortgage Insurance (PMI) | Osprey Mortgage Lending WWW.OSPREYMORTGAGELENDING.COM
What is private mortgage insurance (PMI)?
PMI stands for private mortgage insurance, a type of insurance policy that protects the lender if a borrower defaults on a home loan.
Private mortgage insurance (PMI) is a type of insurance that may be required by your mortgage lender if your down payment is less than 20 per cent of your home’s purchase price. PMI protects the lender against losses if you default on your mortgage.
How does PMI work?
PMI companies write insurance policies to protect approximately the top 20% of the mortgage against default.
This depends on the lender's and investor's requirements, the loan-tovalue ratio, and the type of loan program involved.
Should a default occur the lender will sell the property to liquidate the debt, and is reimbursed by the PMI company for any remaining amount up to the policy value.
How much does PMI cost?
PMI costs vary from insurer to insurer, and from plan to plan.
PMI typically costs 0.5 – 1% of your loan amount per year.
For example: If you buy a $300,000 home, you would be paying anywhere between $1,500 – $3,000 per year in mortgage insurance.
How does the buyer apply for PMI? Typically the buyer covers the cost of PMI, but the lender is the PMI company's client and shops for insurance on behalf of the borrower. Lenders usually deal with only a few PMI companies because they know the guidelines for those insurers. This can be a problem when one of the lender's prime companies turns down a loan because the borrower doesn’t fit its risk parameters. A lender might follow suit and deny the loan application without consulting a second PMI company, leaving all parties in an undesirable position. The lender has the difficult task of being fair to the borrower while shopping for the most effective way to lessen liability.
How to avoid PMI?
You can avoid mortgage insurance altogether by coming up with a 20% down payment.
Though it's certainly a significant amount of funds, you could end up saving thousands of dollars by forgoing PMI. Be sure to look into gift money for your down payment if you don't see yourself reaching the 20% mark alone.
Information source www.ospreymortgagelending.com