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| PMI: Private Mortgage Insurance |
| Buying a home is itself, a great investment. Private mortgage insurance allows you to make this investment in an easier manner, at the same time gives you the opportunity to invest in other investment choices such as stocks, mutual funds, etc. By investing in other investment options, they have a possibility to increase their wealth. |
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| The private insurance market sells private mortgage insurance. The cost of PMI is dependent on the size of the down payment and the amount of the loan. However, usually the cost is within ½ of one percent of the loan amount. This estimate is provided by Mortgage Bankers Association of America. In addition, mortgage insurance premiums are not tax deductible. The mortgage insurer assumes all or part of the default risk; in return the insurer requires a premium. Presently, PMI premiums can be as high as $1,500 per year for a mortgage on a home with a $200,000 value. |
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| Additionally, the amount of premium for mortgage insurance is determined independent of default risk from one mortgagor to another. Instead, the insurance premium is determined based on acceptable or unacceptable risks, and financial standing of the buyer is not considered. The premium is determined only by the down payment amount and the loan amount. This is the reason why two buyers, regardless of financial stability and default risk, would have to pay the same premium provided with the same loan amount and down payment amount. |
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