Private mortgage insurances (also called lenders mortgage insurance) have gained a lot of popularity in America during the last years for people who want to buy a new house. These kinds of insurances protect the lenders against losses in case the borrower is not being able anymore to pay off the loan. It is important you know these insurances only protect the lender and not the borrower.
Private mortgage insurances are only necessary if the cash you have available for your down payment is less than 20% of the value of the house you want to buy. The purpose is to give buyers the possibility to buy a house without waiting until they have saved the down payment.
For example : the house you want to buy cost $200.000 and you have a mortgage of $180.000, this means that the lender is only covered for 90% or in other words the down payment is 10% which is less than 20%. The lender will require private mortgage insurance for $20.000 (10% difference between the value of the house and the down payment).
Private mortgage insurances are a safety for the bank for not having any losses in case they need to sell your house because you can’t pay off the loan.
The cost of this insurance is based on the amount you borrow for your house and added to your monthly payments. On average the annual cost is 5% but maybe you can get cheaper rates if you compare the rates of different insurances. Your percentage of down payment is an important factor. If your down payment is higher, the cost of your PMI will be less.
An important issue is also that charges for PMI are not tax-deductible.
Sometimes you can get rid of these payments of PMI but this depends on the timing of your purchase. It is recommended to check this by your lender. Also when you have paid off 20% of your loan you can request your lender to terminate your PMI. He will check your payment history and if you always have paid on time, there is a chance he will agree to terminate your private mortgage insurance.
Piggybacking is another system to avoid private mortgage insurance. This system means that you take two loans: one for covering the 80% and another for the 20% less your down payment. When you consider to choose for this system it is necessary to compare the rates for avoiding a higher cost than in case of private mortgage insurance. Try to understand that not every lender will give you this possibility!
Shopping around for the best rates and system is the key to have success!