Posts Tagged ‘private mortgage insurance’

Private Mortgage Insurance. What is it, and why do Seattle home buyers need to pay it

10th March

2009

written by robgraham

One or the greatest frustrations for home buyers is when they decide on a monthly payment they are comfortable with only to come to find out that there are several other charges included in their monthly payment that significantly reduces the amount of home they can afford. When we talk about monthly home payments in the industry we are referring to PITI (principal, interest, taxes and insurance). Two charges that we don’t discuss in PITI are home owners dues if you are purchasing a condo or home in a development with HOD’s, and Private Mortgage Insurance or PMI.

PMI is a charge that the underwriter of your loan will insist on you having if your loan is greater then 80% of the purchase price of your home. Why? Well look at it from the banks perspective. They aren’t giving you hundreds of thousands of dollars just because you seem like a nice person. They expect to make money on the loan over time. If for some reason you default on the loan, they want some reasonable belief that they will be able to take possession of the home and sell it to make back the money they have loaned on the home. If you have been able to pay 20% of the value of your home up front, there is enough equity in the home (difference between what is owed and what the home is worth) so that the bank can feel comfortable lending the money. If however you only put 3.5% down, which is typical these days, the bank assumes a greater risk. If you default on the loan, chances are you will not have the money necessary to cover what it will cost to sell the home. Even worse if the home goes down in value then you need even more money to cover the loan, and most likely would short sale the home or simply let it go into default.

To help the bank feel comfortable about the loan they are requiring PMI. It is an attempt to not repeat the blunders of the past few years where banks are taking an enormous hit to their bottom line for 0% down loans and interest only loans. PMI is literally an insurance policy that you are paying for that says that if the bank needs to foreclose on the house and you are unable to pay the difference between the proceeds of the sale and what is owed on the loan, the policy will help pay the difference.

PMI can cost anywhere from less then a hundred dollars to several hundred dollars depending on the amount of the loan and how close you are to the magical number of 20% of the value of your home compared to the loan amount owing.

If you are paying PMI and make a significant payment toward your loan or for any reason in the future believe that your LTV (loan to value ration) is now below 80%, you can contact your bank and ask them to wave the PMI.

There is no incentive for the bank to remove the PMI voluntarily, so be vigilant and check back with them if you think you should not be paying it.

Give me a call if you need help. I really do want to be your agent.