Lender Paid PMI?

A recent decision by the U.S. Federal Housing Administration (FHA) to make mortgage insurance a permanent component on many FHA loans has drawn fresh attention to the issue of private mortgage insurance. PMI is basically an insurance policy that homeowners are required to carry if their loan to value (LTV) ratio is greater than 80 percent. In other words, if you have less than 20 percent equity in your home, your mortgage lender will require you to carry PMI. Once your loan is amortized to 80 percent, you will no longer be required to carry the insurance.

Homeowners have two options for buying the insurance. You can either purchase the policy and pay for it yourself on a monthly basis or have your lender acquire the insurance on your behalf and pay the monthly premium. Typically, the lender will simply add the insurance premium to your monthly mortgage amount.

One of the biggest advantages of this kind of lender paid mortgage insurance is that you do not have to worry about making an additional payment every month. Typically, with lender paid PMI you also tend to pay a smaller amount than you would on your own. That’s because the insurance payments are amortized over the life of the loan and will therefore result in smaller monthly payments.

As appealing as all that sounds, there are a couple of caveats you need to keep in mind with lender paid PMI. The first drawback is that you will have to keep paying the premium even after your LTV drops below 80 percent. Importantly, over the life of the loan, you will also end up paying a larger amount towards mortgage insurance than if you had carried it yourself.

To understand such differences and to see if lender paid mortgage insurance is a good fit for you, contact the financial experts at Avis Lending.

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