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[M653]Mortgage Insurance Payment Calculator

by Brian Jenkins, Bri

Few people have the cash lying around to pay for a piece of real estate in its entirety. In order to become a homeowner, you'll need to apply for a mortgage - a loan that allows you to purchase real estate. However, when you budget for your monthly mortgage payments, that principle and interest of your mortgage loan aren't the only things that you'll need to include in your financial plan. You may also be required to purchase lender's mortgage insurance, which is also sometimes called private mortgage insurance or PMI. Private mortgage insurance is an unexpected expense for many first-time real estate owners. Don't get surprised be this expense!

Private mortgage insurance is meant to protect the lender, not you. If you should stop making payments of your mortgage, your lender has the right to begin foreclosure proceedings. However, this is not the best-case scenario, as lenders aren't in the business of owning property. They need to sell as soon as possible, and depending on the market, this often means that they sell way below market value. If that sell price doesn't cover the amount left on your mortgage, the lender can case in the private mortgage insurance policy you've purchased. This will cover the rest of the cost of the house to ensure that the lender does not lose any money in the long run.

Not everyone has to buy private mortgage insurance. It depends on the terms of your mortgage. Usually, mortgage lenders ask that you pay about 20% of the total property's cost in the form of a down payment. However, if you don't have a lot of money saved up, it is still possible to get a mortgage. This is where the private mortgage insurance comes into play. Usually, you are required to pay for an insurance policy for the lender until you've completely paid off that 20% of the mortgage's principle.

Sometimes, the terms are a bit different, depending on the circumstances. For example, if you have a jumbo mortgage (a very expense loan for a high-priced property), you may be required to keep your private mortgage insurance property for a longer amount of time. Or, if you have an interest-only mortgage payment plan, in which you don't pay on the principle right away, you might not have to carry the plan until the mortgage's principle is paid of at 20%.

What kind of rate can you expect when it comes to private mortgage insurance? That depends on your specific situation. For some people, the monthly premium will be fairly low. For others, it might be fairly high. However, no matter what kind of premium you have to pay, the important thing is that you are prepared to pay it. Some of the main factors that come into play when insurance agents are determining your private mortgage insurance rate are the following: how much you did pay in a down payment, the total price of the loan, the type of property you are purchasing, and your credit score. The more likely you are to pay the mortgage in full, according to these standards, the more likely you are to get a lower insurance rate.

Some people have successfully avoided the need for private mortgage insurance by using the piggyback loan strategy. With this kind of mortgage lender, you're using more than one loan in order to pay for the real estate. You make a 20% down payment, but only by using a second (piggyback) mortgage to pay for part of that down payment. So, you might have an original loan for 80%, a second loan for 10%, and a 10% out of pocket down payment. This way, you avoid the need for private mortgage insurance.

However, the cost for private mortgage insurance might actually be lower than what you pay for the interest on your second loan, depending on the factors listed beforehand. This used to be rare, but today, private mortgage insurance is tax-deductible. That means that it is now less expensive for some homeowners to get private mortgage insurance than it is for them to go for the second mortgage loan. This law will be in effect until at least 2010. It doesn't apply to mortgage agreements signed before January 1, 2007.

Although private mortgage insurance doesn't affect everyone, for many people, this is an expense they have to pay. Be prepared for it. If you are going to purchase a home using a mortgage, it is important to understand your expenses before you sign on the dotted line.

Private mortgage insurance is an additional fee that a lender may require if you do not put down the minimum down payment towards a house, usually around 20%. Does this mean that you can not get the house? No! A lender may option for you to get PMI (private mortgage insurance) which in the case of a defaulted loan, the insurer will pay the lender anywhere from 20-30% of the mortgage balance.

The lender will option for you to get a PMI if they want extra insurance that they will get at least most, if not all the money back that they borrowed. Even if they do lose out on some of the money that was originally borrowed by a home owner, they will have enough to cover costs that are associated with foreclosure and the resell of the property.

So if you can not afford the down payment that the lender expects, realize you have other options and that does not mean that this home is completely out of your range. The premiums for private mortgage insurance are usually less than adjustable rate mortgages and fixed rate mortgages. The premium for private mortgage insurance is based on the amount the home buyer is borrowing as well as the amount of down payment that the home buyer can afford.

For example, the less amount of money you can put down to satisfy the down payment, the more the private mortgage insurance premium would be. The premium may also be larger in neighborhoods or communities where the living expenses are much higher than average communities in the United States.

Because the home owner is expected to pay more money as insurance to the money being borrowed from the lender, there is a time that the PMI can be canceled and no longer will have to be paid. This will be decided by the lender, but usually cancellation of PMI can take place when the home owner has paid up to 80% of the property's purchase price or current market value. This 80% mark will based of whatever total is less: the purchase price or current market value.

The lender is responsible for putting in writing the fact that the home owner indeed has PMI and must be in contact annually of when the PMI can be cancelled. In order to protect the home owner from paying too much money as insurance, when mort of the value of the house is already paid for, the Homeowners Protection Act (HPA) established these private mortgage insurance policies.

In addition to the lender having responsibilities regarding PMI, the home owner must maintain timely payments, not to exceed 60 days late with a mortgage payment in two years, and 30 days late within one year. This protects the lender as well, so that the insurance is not cancelled if the home owner is too much of a risk, and may possibly default on the payments.

In order to cancel PMI, the lender will have to agree that the home owner has paid at least 80% of the purchase price or current market value. He or she can do this by having the property appraised and taking in to account an increase or decrease in value over the time that has elapsed. The HPA also requires that there be no other mortgage on it or a home equity loan. They basically want to see that you can continue with the monthly mortgage payments without defaulting. This way, the lender will get his or her money back as originally proposed.

The home owner does not get to choose the company that distributes the private mortgage insurance because it is protection for the lender. Therefore, the lender may choose the PMI company and you can not really change that. However, in order to avoid complications or fraud, always be apprised of the terms of the loan, what is required of the down payment, what are the minimums in order not to pay additional PMI payments, as well as the terms for cancellation. Work with only reputable lenders that are fully qualified and licensed professionals that have good references.

If you feel PMI is too much additional money to buy a specific house, you can always save more money for a down payment and then try again with a new property or the current one if still available. Only make financial decisions that are with in your comfort zone in order to avoid default payments, foreclosure, and other horrible incidents that occur when financial obligations are greater than one can meet.

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Both Brian Jenkins & John R. Blakefield are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

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