The Problem with Private Mortgage Insurance

Believe it or not, many home owners already have mortgage insurance of a sort, even though they may not realize it. Most lenders require that you pay for private mortgage insurance (PMI), also called lender’s mortgage insurance (LMI), when you first buy a home. The problem, of course, is that private mortgage insurance does nothing to benefit you. You pay the premium; the lender is reimbursed if they lose money on you.

The bottom line: It’s insurance for them, not you, and it isn’t cheap. Depending on your the loan amount and down payment, PMI could add hundreds of dollars to your monthly mortgage payment.

Typically, a lender will require private mortgage insurance for any mortgage with a principal in excess of 80% of the home’s value. Thus, they’ll only agree to forego private mortgage insurance if you’ve already paid off 20% of the loan. Even then it may be difficult to cancel since some lenders will require it for a period of several years regardless of the principal balance. Your lender might even insist on a new appraisal of the home, possibly denying your request to stop paying for their insurance.

Thankfully, there are ways to avoid the private mortgage insurance requirement. If you are able to make an initial down payment of 20% or more, for example, you may be able to avoid paying for PMI. It’s also possible to get a second mortgage to cover the difference between your down payment and 20%. 80/15/5 arrangements, for example, with a second mortgage equal to 15% of the value of the home plus a 5% down payment, are a common method of dodging PMI with a low down payment. It may also be possible to obtain special home loans through certain government agencies that don’t require PMI.

Being able to avoid private mortgage insurance is great because you don’t have to pay something for nothing. Doing so, of course, doesn’t negate the financial risk that your mortgage represents to you. It is advisable, then, to take the money you save by not insuring your lender and put it toward insurance for yourelf. Mortgage protection and mortgage payment insurance can go a long way toward reducing the risks associated with your mortgage debt. More importantly, though, you can be assured that your money is going toward covering your risk, not theirs.