Mortgage Guide: Every Mortgage Holder Should Understand PMI

We seem to need insurance for everything today. From our lives to the house, from the car to our health, and even on our mortgage. PMI, or 'private mortgage insurance', is a term used for describing the type of insurance that will protect a lender against a mortgage loan default. It usually comes into play whenever there is a down payment that is less than 20 percent of the overall price of the home.

Your monthly premiums that you are required to make are based on the amount of your down payment and the overall total of the loan. Usually the payment is about 1/2 of 1 percent against your total loan value. The payments get added to the mortgage so it's easier to stay paid up and kept track of.

One good point about the PMI is this, if you happen to be someone that was required to take it, you don't have to worry about carrying it for the whole term of your loan. Once you get to the point of paying the loan amount down by 20%, the lenders automatically will discontinue your PMI premiums. This is a law requirement, that they MUST stop those payments once the balance of your loan gets to 78% of the original amount. This typically makes a difference of about $37 to $50 in your monthly payment.

The best scenario you can have is not to need to pay the PMI period. There are a few ways of avoiding this. One is to take a higher rate of interest, which usually ranges from .75 to a whole point. Another is by applying two mortgages to the home, having one cover 90% of your total purchase price while the other covers the 10% that's left. Both options will require that your go over your numbers carefully to clearly see whether or not they will provide you with financial benefit for the whole term of your loan. One full percentage point of increased interest will add up to be a massive load in additional interest charges throughout the term of your loan, and could well exceed anything you might have paid via PMI insurance.

 You need to know also that if your loan happens to get classified as 'high risk', now the lenders are required also by law to keep the PMI intact until you have 50 percent of your equity built up. Usually these loans are given to people who had loans and didn't produce the adequate income documentation, and also had a shaky credit history. It's best to talk person to person when dealing with mortgage providers about how much time you have to keep carrying the PMI.

If you seriously want to end up ahead of the game, then it's best just to be ready with 20% to put down and have a decent credit report. Achieving both of these can sometimes take some years, but they can deliver some great benefits when it comes to purchasing your home.  It’s well worth making the effort and doing it the best way for having the least pain for the term of your loan.