What is the Cost of Private Mortgage Insurance

The mortgage insurance industry has been rocked with the collapse of the subprime. But an opportunity presents itself to the mortgage insurance industry in the form of private mortgage insurance or PMI as there is a foreseen increase in the demand for this type of mortgage insurance.

What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance or PMI is an additional insurance that safeguards the lender from borrowers’ defaults while enabling the borrowers to qualify for homes faster. PMI significantly reduces the risk on the part of the lender against loss if borrowers default on their amortization. It also allows homebuyers or borrowers who do not meet the 20% downpayment qualification to have access to home ownership.

How Does PMI Benefit the Borrowers/Homebuyers?

PMI benefits the borrowers in many ways. The borrowers do not have to wait for a longer period of time or until he is able to meet the 20% qualification to be able to acquire his new home, which means putting ‘more people in more homes’. The availing of PMI will also mean deductibles from taxes. A federal law mandates that PMI be tax deductible of up to 100% of the borrower’s PMI paid premiums. The interest rate of PMI is fixed and predictable. Even if the prime rate increases, the interest rate of PMI stays the same. A borrower does not have to wait to pay for his loan amortization in full to cancel PMI, as it can be cancelled once 80% the principal balance is settled, and when the present value of the home has increased that the loan to value (LTV) ratio, determined by an appraiser, is 75% or less. The borrower, to be able to cancel his PMI should be of good payment standing.

How Does PMI Benefit the Lenders?

PMI assumes the financial obligation of the borrowers in case they default on their payment. On the average, PMI reimburses the lenders on the following: principal amount of loan and interest, foreclosure expenses, and legal fees. Flexible, PMI can be paid in many different ways: single, annual, monthly, or financed premiums. As a default protection, PMI provides the lenders additional liquidity when reselling to the secondary market.

What is the Cost of Private Mortgage Insurance?

The cost of private mortgage insurance depends on the duration of the mortgage loan and the amount of downpayment.

On the average, the following is the cost of private mortgage insurance depending on the length of term of the mortgage and downpayment size:

15% Downpayment
15-Year Fixed Mortgage : .26%
30-Year Fixed Mortgage : .32%
1-Year Adjustable Rate Mortgage : .37%

10% Downpayment
15-Year Fixed Mortgage : .46%
30-Year Fixed Mortgage : .52%
1-Year Adjustable Rate Mortgage : .65%

5% Downpayment
15-Year Fixed Mortgage : .72%
30-Year Fixed Mortgage : .78%
1-Year Adjustable Rate Mortgage : .92%

As mentioned earlier, there are several payment schemes. One can bundle it with his monthly payments. Another is to pay a one-time single payment. The lender can also assume the payment but to cover the cost of private mortgage insurance, the lender will have to increase the interest rate. Each scheme has its own pros and cons, so it is essential that one weighs them first before deciding to settle for one’s home.