By: Lester Jones
Most banks are not too keen on losing money over foreclosed investments; however, administering house deposits is still a number one priority in the quest to keep funds flowing through the economy. That’s where private mortgage insurance comes in handy.
This type of cover comes into play when buyers have a deposit worth less than 20% of the home’s value, an increasingly common scenario for many young buyers. For buyers, it’s worth choosing a mortgage insurance policy carefully, as some offer more protection than others - for example, financial coverage in the event of a loss of income.
What is Private Mortgage Insurance?
According to Investopedia, PMI is an extra payment on top of a regular mortgage which lenders tend to demand when the home deposit paid falls short of 20% of the total loan amount. It’s ultimately an insurance policy against foreclosure and said policy comes in several varieties, the most common being borrower-paid.
This is paid monthly on top of a standard mortgage payment. Single-premium and lender-paid insurance are also quite common, involving a one-time payment, or increased-interest repayments over the entire loan period, respectively. Some take into account the size of the loan needed, the deposit saved, and your employment situation (i.e. part-time or casual) amongst the factors which affect how much a lender asks for mortgage loan insurance. Fortunately for the borrower, free online services are available to assist them in calculating their mortgage insurance payments and many other aspects relating to their property purchase.
So what’s in it for the lender? Instating private mortgage insurance is mostly about having less on the line in the event of a foreclosure. Risk is the biggest consideration for any lender when dishing out payments for home loans, and if they make a poor choice, there’s a chance they won’t get their money back.
The extra payment added onto the mortgage for private mortgage insurance goes straight towards paying off the lender’s investment, making it a sure bet when it comes time to receive payments. What’s more, the majority of the time, the borrower foots the bill for private mortgage insurance. The lender doesn’t need to chip in any extra unless it’s under the lender-paid plan mentioned above. Naturally, this is a huge incentive for lenders to instate a PMI policy, as any method of ensuring the money lent out comes back is a good measure to have in place.
Ultimately, it falls in the lender’s favor. According to Bankrate, buyers can expect to pay between 0.3 and 1.5 percent of your original loan each year in private mortgage insurance payments - no small task in addition to the already-challenging standard mortgage payments.
Those who can’t meet that mark will likely find themselves with a poor credit rating and potentially the challenge of finding a new house, while the bank will get the bulk of their money back under their PMI policy.
That being said, it’s not all bad for the buyer. Smart Asset assures that, although private mortgage insurance is designed to protect lenders, there are also some benefits for home buyers which could be well worth considering in order to get into your home sooner, the first being that it allows you to put less money down. Saving up for a house deposit is becoming more of a challenge as house prices inflate and incomes stagnate, but with a private mortgage insurance policy, you can lower the bottom rung of the ladder and get into the property market sooner.
This could save a great deal of money in the long term, as property prices continue to rise. According to The Mortgage Reports, the single biggest advantage PMI offers would-be buyers is the ability to purchase a home for what it’s worth now, rather than spending years saving for a deposit only to face an inflated cost in the future. Logistically, mortgage insurers are likely to provide financial assistance if buyers face temporary financial struggles in order to prevent foreclosure, the alternative being that they cover the lender’s loss if it eventuates.
Some PMI policies can also provide buyers with extra insurance for the unexpected. Every home buyer knows the stress of an unstable income or a difficult time at work, with the need to make monthly mortgage payments constantly in the back of their mind. There are also insurance companies who will throw job loss protection into your policy for some peace of mind, so it’s worth reading up on the benefits you can expect to receive.
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