Private Mortgage Insurance (PMI) can be your financial friend in that it makes it possible for you to get a mortgage even if you don't have enough capital to make a 20% down payment. But it can also be your worst enemy because it can raise the overall cost of buying your home in a big way. If you plan to buy a home using a mortgage, then you should understand what PMI is and how it works.

What Is Private Mortgage Insurance?

Private mortgage insurance pays out a benefit to the bank or other mortgage provider if you are unable to repay your mortgage. The first thing to understand is that this type of insurance does not pay you a benefit. It is designed to protect the lender that provides your mortgage. If you fail to pay the lender the money you owe, this insurance will cover their loss, but you will still (usually) lose your home.

This is not a mortgage insurance that will cover your mortgage payments if for some reason you are unable to do so. If you want insurance that will help cover your mortgage payments if you unexpectedly become unemployed or disabled, you should look up mortgage protection insurance.

How Does Private Mortgage Insurance Help You?

Private mortgage insurance is the private alternative to FHA guaranteed home loans. It helps you by making it possible for you to get a mortgage even if you can't afford to pay a 20% down payment. You are required by law to have mortgage insurance if you don't own at least 20% of a property, so the only way to buy a home or an investment property without paying at least that amount up front is by getting either an FHA insured mortgage or using private mortgage insurance.

Do I Need Mortgage Insurance If I have 20% Equity?

PMI can cost you anywhere from 0.3% to 1.5% of your mortgage each year. The amount you pay will depend on the deal you find, as well as your credit history, income and other factors.

If you have a balance of $150,000 and you pay just 1% of this each year for mortgage insurance, you can end up paying a lot of money for this mandatory insurance.

Do I Need Mortgage Insurance If I have 20% Equity?

Once you have 20% equity in your home, either because you are able to pay 20% as a downpayment or because you have paid off 20% of the value of your home, then there is little benefit to getting or keeping private mortgage insurance. Remember, PMI does not really benefit you at all. It benefits the lender.

But if you don't have money for a down payment and you want to buy a property immediately to avoid paying rent or to take advantage of a great deal on a home, this insurance can be your ally.

Unfortunately, once you get a mortgage with PMI, you won't be able to cancel your private mortgage insurance policy for the life of your mortgage. Over the full length of your mortgage, this can add tens of thousands of dollars to the cost of buying a home.

The solution here is to refinance your mortgage once you have paid off 20% of your property. When you switch to a new mortgage policy, you won't be required to get private mortgage insurance for your new mortgage because you already own 20% of your home.

If you want to refinance your loan to put an end to PMI payments, you can use our mortgage comparison tool to find the best available refinance deals:

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