How Much Is PMI on a Mortgage?

Nov

How Much Is PMI on a Mortgage?

Buying a home is expensive, especially in these days of a poor world economy. A good chunk of your salary will go to the payment of your home if you are not careful when buying it. It is important to buy a home that is within your means and not to use all the money in your bank to make the payment for the home. There are tens of ways of keeping the mortgage payments on your home low, such as the removal of PMI payments.

PMI is an insurance policy designed to protect lenders from defaulting buyers. In the event of a foreclosure or a declaration of bankruptcy that causes a default, the insurance company will have to pay part of the losses to the lender. Even thought it is of no benefit to the borrower, its presence has enabled a lot of borrowers to get homes even when they do not have 20% of the down payment to deposit with the bank.

PMI is generally 0.5% of the value of the loan balance. For e example if you want to buy a home whose value is $250,000, and you have paid off 5% of the value of the home as down payment, you will have a balance of $237,500 and 0.5% of this is what will go to PMI payments. In other words, you will have to pay $1187.5 every year in PMI. Every month, you will have to pay $98.9. If it will take you 3 years to acquire 20% equity on the loan, you will have saved $3562.5 by getting rid of PMI.

You will pay PMI only when you do not have 20% of the value of your home. When you have paid this, the PMI will be reduced. You can pay off the 20% from the beginning and avoid it altogether but as it is almost impossible for many people to do, you can borrow money from friends, take another mortgage on the property or even take money from your retirement fund to get to your 20%. You can also talk to your company to get rid of PMI from your payments and in exchange increase the interest rates you will have to pay on your mortgage. This will go a long way in reducing the total amount you will pay to the lender in mortgage premium. Make sure you have made your calculations well before doing this, so that you ensure you are really paying less in the long run.