What is Private Mortgage Insurance?

Anytime you discuss financing a home or obtaining a mortgage, you’re certain to be told how advantageous it is to avoid needing private mortgage insurance. But, what you may not be told is what exactly private mortgage insurance is. Isn’t insurance usually a good thing? Why does this insurance have such a bad reputation?

Private mortgage insurance (PMI) is the insurance required by lenders when the borrower has to borrow more than eighty percent of a home’s appraised value in order to finance the home. PMI is used to guarantee that the lender will be paid in full if the borrower defaults on the loan. The premiums for this insurance vary from insurance agency to insurance agency, but are often as high as $1,500 per year. In most cases, the premium is paid to the lender as part of the homeowner’s monthly mortgage payment.

The substantial increase to your monthly payment caused by PMI is a huge part of the bad reputation that accompanies PMI. The incremental amount can put a hefty strain on a family’s finances when every dollar counts. And, unfortunately, the average family will never feel any benefit from this insurance. After all, PMI is only called into play if the homeowner is unable to meet his monthly payments and the house is foreclosed upon and sold for less than is owed to the lender.

If you are required to pay PMI premiums as a part of your mortgage, there are two important things to keep in mind. First, PMI is only necessary until you have paid enough towards the principal of your home loan to reduce the outstanding balance to less than eighty percent of your home’s value. Once you have made enough headway in paying down your mortgage, you can order a new appraisal of your home’s value and ask your lender to cancel your PMI. The one-time cost of the appraisal will more than pay for itself as you save your premium payments.

Finally, with advent of a new 2007 tax law, many taxpayers are able to deduct the cost of their PMI premiums from their income taxes. Although the deduction won’t alleviate all of the financial stress that comes with making PMI payments, it will put a little bit of money back into your pocketbook. Be sure to tell your tax preparer if you are paying PMI premiums and ask him if the deduction will apply to you.

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