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Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?

Updated on May 26, 2009

PMI is the acronym for Private Mortgage Insurance, a feature of many sales contracts but surprisingly one that most buyers don't need and shouldn't obtain!

A 20% down payment is the magic number in Mortgage financing. That 20% cash makes the Mortgage lender much more comfortable in the knowledge that not only is the buyer financially secure to be able to afford such a downstroke, but if the monthly payments stop coming, there is going to be ample equity in the property for the Mortgage lender to be able to liquidate and not lose any money.

PMI creates a no-lose situation for the lender as if you default and the property goes into foreclosure in situations where there is insufficient equity. The insurance company covers the losses and if there is one thing an investor does not want to do is lose money. There are a number of Mortgage programs that clearly specify that anything less than 20% equity will automatically trigger a demand for PMI. It has become a fairly well de facto standard in the realty game.

On average, PMI will cost you about $800 per year for every $100,000 of mortgage amount. With houses in many areas now requiring loans exceeding $300,000, that can certainly add up to a significant amount of money.

What most people believe about PMI is generally wrong. First of all PMI only covers the amount of loss in a foreclosure situation. If you are unable to make the payments, PMI does not make them for you. Furthermore, it is not tax deductable like the Mortgage interest expense. If you're starting to see PMI as a great deal for the lender and a raw deal for the buyer, you're getting close.

Let's take a hypothetical Mortgage amount of $250,000. That amount would require about $2,000 per year PMI payment over the term of the loan. If you were to instead take that $2,000 and invest just the first 10 years of monthly payments in a retirement account, by the end of the 30 year term of the loan you'd have a really nice nest egg of over half a million dollars!

The easiest and best way to avoid PMI is by coming up with 20% down. That might not be so easy for some first time home buyers, but they need to investigate all the possibilities, including getting loans from family and friends. Another way is to work with a Mortgage broker who specializes in getting people out from the PMI millstone. There are some ways of structuring the loan so that PMI is not required, even at equity levels well below 20%. If all that fails, then negotiate with your lender to roll the PMI payment into the interest. You would accept a slightly higher rate but then the lender pays the PMI on your behalf and you get to deduct the entire payment from your taxes.

PMI is a tricky business and you should locate a reliable mortgage professional to help you through the process. You should consult with local real estate professionals to see which mortgage professionals in your area are most recommended due to their reputation.

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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