Credit unions operate much like banks, offering checking and saving accounts and lending money. These institutions usually offer mortgage services, meaning that you can finance your home with a mortgage loan originated at them. Some consumers prefer the personal touch of working with their local credit union. Credit unions, though, require many of the same protections when making mortgage loans, and that might include private mortgage insurance.
Private Mortgage Insurance
Private mortgage insurance, better known as PMI, is designed to protect lenders that make mortgage loans that require low down payments. If you buy a home with a down payment of less than 20 percent of the home's purchase price, most lenders -- including credit unions -- require that you pay for PMI. This insurance, then, makes it possible to buy a home with down payments of as low as 3.5 percent to 5 percent, depending on your lender. PMI is not the same as mortgage protection insurance that pays off your mortgage loan in case you die before doing so.
How much you pay for PMI varies, depending on how large your mortgage loan is and how large of a down payment you provide. You might pay anywhere from 0.3 percent to 1.15 percent of your original loan amount in PMI a year. If you borrowed $200,000, your cost for PMI could range from $600 to $2,300 a year.
If you want to avoid paying PMI when borrowing from your credit union, you must come up with a larger down payment. Down payments, though, can be expensive. If you want to provide the required 20 percent down payment on a $200,000 mortgage loan, that comes out to $40,000, a large sum of money. If you do have to pay PMI on your loan, there is some good news: It is tax deductible through 2013. There was some hope as of this publication that the federal government would make it tax deductible beyond that year.
If you do have to pay PMI with your credit union loan, you'll usually pay it throughout the year, sending your credit union extra money with each mortgage payment. If your PMI comes out to $600 a year, you'd pay $50 with each monthly mortgage payment.
You can cancel PMI after you've paid off enough of your principal balance that your loan-to-value ratio -- the relationship between how much you owe on your mortgage loan and the appraised value of your residence -- hits 80 percent. Your lender is required to automatically cancel PMI after your loan-to-value ratio falls to 78 percent.
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