Mortgage Insurance

What is Private Mortgage Insurance?

Real Estate

There are many things you’ll need to be aware of when buying a home. Understanding the specifics can help you make informed financial choices that support ongoing security. 

Knowing the basics of private mortgage insurance is a critical first step. When you understand the process, you can evaluate your financial obligations and, hopefully, avoid paying extra fees now and in the future. 

So what is private mortgage insurance, and how does it affect you as a home buyer? Here’s what you should know. 

What is private mortgage insurance? 

Private mortgage insurance, otherwise known as PMI, is an insurance scheme designed to protect your lender if you default on your loan repayments. 

Generally speaking, private mortgage insurance is only a requirement if you plan to borrow more that 80 percent of the total property value. This is because a low deposit, and subsequent low equity, poses a greater risk to your lender. 

The benefits of PMI

The main benefit of private mortgage insurance is that it could allow you to break into the property market sooner, or it could support the purchase of a more expensive property. 

Paying PMI won’t protect you from foreclosure if you fail to meet minimum repayment requirements. What it will do is help you qualify for the loan you need, even if you have less than 20 percent deposit towards your purchase. 

PMI doesn’t last forever. Once you pay your mortgage and reach a 20 percent equity share in your property value, you should be able to request for your lender to cancel PMI. However, you may need to go through a property appraisal or meet minimum term requirements before your insurance fees are waived. 

Disadvantages of PMI

Private mortgage insurance also has some disadvantages, and it’s important to consider these carefully ahead of time. 

Paying PMI will mean that you pay extra towards your property purchase. Often, PMI rates are calculated at a rate between 0.46 and 1.5 percent of the loan amount, but this can vary depending on your lender and current market conditions. 

Additionally, PMI may prevent you from paying extra towards your loan. The money you pay as private mortgage insurance goes straight to your lender instead of contributing to your equity. This means you’ll be paying fees without seeing return on investment. 

What should you do?

While PMI can be a helpful tool to help you purchase your dream home in some cases, it’s usually best to avoid paying it if you can. 

Wherever possible, plan to contribute at least 20 percent deposit towards your property purchase. This starts you off with greater equity and helps you steer clear of PMI obligations. 

If you’re feeling unsure, remember to seek guidance from your lender or from a skilled mortgage broker who can help you evaluate your options and choose the right path forward. 

Get help with your loan, and receive guidance on the specifics of private mortgage insurance and other property-buying concerns. Contact the team at Our Top 10 to find the best mortgage broker Sydney has to offer. 

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