Private mortgage insurance comes into play when one’s down payment on a particular home is twenty percent less than the sale’s price or the appraised value of the home. Private mortgage insurance (PMI) allows the potential home buyer a more affordable mortgage down payment option than would otherwise be the case. Private mortgage insurance rates normally fluctuate based on the down payment amount and the size of the loan, but the rates typically hover around one to half of one percent.
The private mortgage insurance rate usually presents itself as the PMI figure under one’s monthly mortgage statement. Although the loan amount and the related PMI rate, home owners with a PMI usually pay between fifty and two hundred and fifty dollars per month towards their private mortgage insurance. A private mortgage insurance essentially arises in the first place because the lender to the home owner wants partial reimbursement of the mortgage should the home owner default at some future time.
From the outset the loaner looks to craft a loan to value (LTV) ratio to determine whether the home owner needs to pay a PMI monthly amount. The LTV ratio as determined by the lender also dictates the terms and duration of that PMI payment. Logistically the loan to value ratio is determined by computing the value of the loan against the total or projected cost of the house. For instance, if the house was appraised or sold at two hundred and fifty thousand dollars, and the loan amount was given at two hundred thousand dollars, the loan to value ratio would be eighty percent.
As a basic rule of thumb, whenever the loan to value ratio is over eighty percent, the homeowner will be obligated to submit monthly payments to the creditor via private mortgage insurance payments. This essentially means that the more the homeowner takes out as a loan to offset payment for a home, the more likely a private mortgage insurance is likely to be for that particular homeowner.
So where do the terms in private mortgage insurance come from? Well, the term private in private mortgage insurance stems from the fact that these policies are exclusively offered to private enterprises over government affiliates or public mortgage creditors. Again, the purpose of a private mortgage insurance is to provide the lender with assurance and compensation against a possible default on the mortgage by the homeowner. That said, one chief difference between private and public mortgage payments is that public mortgage payments never really expire whereas a PMI can expire at some point.
Just to recap, private mortgage insurance applies to homeowners who require large loans to offset the real or projected cost of a home. The purpose of the PMI is to provide assurance and equity for the lender against possible default of the mortgage. Usually a PMI is required when the loan to value ratio is over eighty percent, or when the potential homeowner demonstrates poor credit. Private mortgage insurance is payed in manageable, small monthly installments to assure and protect the lender against homeowner default on mortgage payments.