Taking out a mortgage is one of the most important things you will ever do in your life. Most people strive to become a homeowner. So instead of renting and not building any equity, you pay off your mortgage and build equity in your home. It can be extremely rewarding but you need to choose the right type of mortgage.
Typically mortgage lenders require that borrowers pay at least 20 percent of the home purchase amount as down-payment. The remaining 80 percent of the amount can then be obtained as a mortgage. Some lenders also allow borrowers to take mortgage for more than 80 percent of the home purchase amount, however they charge very higher interest rates since the risk for the lender is higher. This risk can be reduced up to a certain extent if the borrower takes out private mortgage insurance (PMI).
PMI is a certain insurance policy which is provided by some private mortgage lenders and is used to protect them against loss if a borrower defaults. The private mortgage insurance will allow you to purchase a home, independent of the amount you put forth for a down-payment. This means the lending institution is protected against the default and you are still able to get the lower mortgage interest rate. In order to be approved for this type of insurance, you typically need to pay an initial premium payment on top of your regular mortgage payment.
The insurance premium would depend on the type of your loan, amount of your loan and the insurance agency which issues the PMI. So if you are applying for an adjustable rate mortgage, your premium would be higher than on a similar amount fixed rate mortgage. Similarly higher the loan amount that you apply for, higher should you expect to pay for the insurance premium.
Most importantly, you are only required to continue with the PMI till your equity in the purchased house is less than 20 percent. As soon as you are able to make enough installments so that your equity in the house goes above 20 percent, you can discontinue with PMI. Your equity in your house can also increase is the price of the house increase.
If you are unsure about PMI or need help with your mortgage insurance, you can hire a mortgage broker. If you hire well qualified and experienced broker, he would know the rules and regulations and can help you in applying for mortgages which might or might not require PMI. A mortgage broker can also help you with the required paper work.
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