A Closer Look At PMI

PMI stands for private mortgage insurance. No one really cares about it until it's time to get a mortgage. If you aren't putting down at least 20% expect to see a PMI charge as part of your payment each month. It's basically like paying an extra 1% of interest on your loan per year.

Why would anyone do that?!

The banks require it. In the olden days, buyers HAD to have a decent down payment so that the banks felt comfortable loaning the money. In order to increase their business the banks figured out a way to offset this risk to an insurance company that insures them against default. Of course, the buyer has to pay for this.

Note that I said, "insures them [banks] against default". This will benefit the banks, -not you, the borrower. If you default, the PMI company may cover the bank's losses, but they can then come after you for the money unless the bank has forgiven the loan.

I was meeting with a seller the other day who thought the whole thing was crazy. He said, "The banks think we can't afford $1100 a month, so instead they charge PMI, increasing the total payment to $1200 a month! That doesn't make any sense!"

He's right, but having PMI was the only way that the bank would have made this loan. It was figured into the payment from the beginning and without it, he might still be renting.

The good thing is that Federal law requires PMI to drop off after you have at least 22% equity in the home. You can also be proactive and get them to remove it as soon as you reach 20% equity in the home. Contact your lender to find out how they handle it. If you've made improvements or had substantial appreciation you may be able to have the home appraised to show the increase in equity and get the PMI removed.

Please note that I am not a mortgage guy so check with your lender to better understand your exact situation and how PMI affects you.

-Peter

www.NashvilleCityHomes.com