Yesterday we talked about how it is fairly easy to get a mortgage without putting 20% down for a deposit. Twenty Percent is a lot of money and honestly there are so many people that just do not have that. There are programs out there that allow families to get a mortgage without the 20% down.
But, like all good things there is a catch and with a conventional mortgage the catch is Private Mortgage Insurance or more commonly known as PMI.
It is really a very simple concept and works this way. When ever a business increases its risk it is entitled to greater profits. Whether you like it or not that is how the system works and honestly, it is a system that has served us well for a very long time.
So, if you are negotiating for a conventional mortgage and cannot put 20% down you will be forced to buy and pay for PMI. The PMI monthly payment varies with every mortgage but if you think of roughly, very roughly, it will cost you about $300 each month. That PMI monthly payment is in addition to your monthly mortgage payment.
Here are some of the factors that will determine how much your PMI payment is:
- Credit Scores
- Percentage of your down payment
- Amount of the mortgage
Roughly, your PMI monthly payment is going to run between 1½% and 3% of the mortgage per year, that yearly fee is paid over monthly equal payments.
**Hint** It pays to shop around and see what The Bank is going to charge you for PMI, they are not all the same!
PMI does NOT stay with your mortgage for the duration of the loan. After you have paid 20% of the mortgage the PMI can be cancelled by the bank. Once the loan-to-value ratio drops to 78% the bank is required to drop the PMI payments. Again, it does pay to shop around and find the best conditions for your mortgage.
After you have become thoroughly annoyed with The Bank because you must have and pay for PMI…….., don’t forget that monthly fee has two great advantages: First, it is probably going to end up costing you less than renting. Second, your PMI payments are tax deductible.
So, what do you think of PMI? Join the conversation and share your opinions.