Avoid the Mortgage Insurance Pitfall

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If you have decided to buy a home, but do not possess the complete funds to cover for 100% of the payments, then a mortgage loan is the best solution for you.

Just as an explanation, a mortgage loan allows you to borrow enough money to purchase you home, using that home or property as collateral. You will then determine from your mortgage company, how long your loan term is, how much you will be paying, and what your interest rates will be.

Now, you probably have heard of private mortgage insurance and its significance to you and your lender when it comes to monthly payments. What is private mortgage insurance (PMI) anyway? Simply put, PMI insurance protects the best interests of your lender, especially if you are unable to make payments on your mortgage.

When is mortgage insurance applicable? Sources say that lenders will require their mortgage applicants to pay for PMI when they are making a down payment of less than 20% of the appraised value of the home that is being purchased. In this regard, 80% of the unpaid amount will be charged a rate per month that goes to private mortgage insurance or mortgage protection insurance. According to Bank Rate, this can be from 0.5% to 1% of the remaining balance for the house payments.

To make this a little clearer, here is an example that illustrates mortgage protection insurance and its impact on your budget for house payments. You want to buy a house that is worth $100,000, and you make a payment of $10,000 as 10% down. Of that amount, $90,000 is remaining, or 90% of the value of the home. We multiply $90,000 by 0.05%, and you will be paying an additional $450 per year. Remember, that will be an additional $37.50 on your monthly plus the amount for your mortgage loan.

This additional unnecessary expense is the reason why a lot of financial experts do not advice paying less than 20% of a down payment and accepting the PMI agreement when making a house purchase. If possible, you can opt for a mortgage loan that follows an 80-10-10 scheme instead. This means that you make a 10% down payment, and two loans, one for 80% of the value, and another for 10%. Both loans have different interest rates, but you will be paying the monthly together.

Using the same example on the amount of the house to be purchased, which is $100,000, you will make that $10,000 down payment. Now you need to take a loan for 80% of that amount at 7.5% per year, and the 10% will be loaned at 9.5% per year. In the long run, your total monthly payments will end up as $643.

Comparing that to how much you will pay if you opted for a down payment plus private mortgage insurance, you will be paying a monthly of more than $660. This is according to calculations from the Bank Rate website. As you can see, you can avoid PMI and save more money. Learn more about these options now.

January 25th, 2008 by Local Fresh


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