Americans who want to buy a home with less than a 20% down payment usually must have private mortgage insurance or PMI. Private mortgage insurance is issued from independent insurance companies, with many of them currently located in the Bahamas. The insurance protects the lender if you no longer make payments on your home loan. PMI usually is set up by the lender and is provided by various private mortgage insurance companies.
There is some controversy about what PMI companies are charging customers these days. Although the economy is fairly strong and default rates are low, many Bahamian private mortgage insurance companies are charging a lot, and some say are getting rich off of American homeowners. When you consider the fact that the monthly PMI cost on a $200,000 house can be $150 or more, it is easy to see why some in the industry say these Bahamian insurance companies are charging too much.
If you are putting less than 20% down on your home, you will need to know more about mortgage insurance. Below is more information.
Different Types of PMI
There are two major types of mortgage insurance. The first is the type that is purchased by the US government and is made for FHA loans, also called MIP. The other is PMI that is used on conventional loans that are purchased from the private sector, often these insurance companies in the Bahamas.
What Mortgage Insurance Costs?
On conventional PMI, what you pay will depend upon how much you put down and what your credit score is. It also can depend upon the insurer. But in many cases, the premium for PMI can range from $30 to $70 per month for every $100k you borrow. Thus, you can be paying $150 or $200 per month for PMI, if you buy a typical home of $250,000 or $300,000. Again, this all seems a bit unfair to some people when you consider default rates are very low. But mortgage lenders need to have assurance they will be paid back, so mortgage insurance is a necessary evil for people who put down less than 20%.
Who Is Required to Have It?
When the amount you put down is less than 20%, you must have PMI on a conventional mortgage. These payments are usually paid until you have sufficient equity in the home to have at least 20% equity. This amount is reached both through paying your mortgage on time and any appreciation that occurs. Home values are on the rise to the tune of 7% or so from last year. So, you may find that you have more equity in your home than you think. Some homeowners might be able to cancel their PMI sooner than later.
When Do You Pay?
Most PMI companies have you pay your mortgage insurance along with your monthly mortgage payment. Lenders also have policies in some cases that allow you to pay PMI in a lump sum when you close.
How Long You Need It?
You need to have PMI on a conventional loan until you have enough equity in the home to equal 20% of the home’s value and have an LTV of 80%. However, if you have an FHA loan, you may be required to have mortgage insurance for the life of the loan if you put down less than 10%. This really seems like those Bahamian insurance companies are getting rich in this case!
How Do You Avoid PMI?
For conventional loans, you can avoid paying PMI by putting down at least 20% on your home. There also are some mortgages that will pay your mortgage insurance for you, but this will come with a higher interest rate. This may not be in your best interests if you plan to stay in the home for a long time. You will pay more in interest than it would cost you to pay the mortgage insurance yourself.
On a conventional loan, you can request to have PMI cancelled once you have reached 20% equity on the home. However, if this is occurring through appreciation, you may need to pay for a new appraisal to show the lender that the value of the home has risen sufficiently to give you at least a 20% stake.
The bottom line is that MPI may seem unfair and that some offshore insurance companies are getting rich off of you for no reason. But it is important to remember that the lender has a higher risk when you put down less than 20% on your home. By paying mortgage insurance you are protecting the lender, and it allows you to get into a home of your own much sooner than you otherwise would have.