So you’re wondering what private mortgage insurance (PMI) entails? We’ve got you covered.
PMI is often given a bad rap, but the positive side of PMI is that it allows more buyers to purchase a home with less than 20% down.
Before considering a mortgage with PMI, it may be helpful to learn a little bit more about it.
PMI is a typical requirement for conventional mortgage loans when the homebuyer has a down payment that is less than 20% of the home’s value. Essentially, the homebuyer pays an additional fee each month, which is used by the lender to obtain PMI for that specific mortgage.
PMI protects your lender from losing money if you stop making your monthly mortgage payments. It’s sometimes confused with homeowners insurance, but PMI is designed to shield the lender, while homeowners insurance is intended to protect your home after you purchase it.
As a buyer, you won’t need to worry about arranging your PMI payments; your lender will do that work for you. PMI is usually paid monthly, but in some situations, it can be purchased up front. Fortunately, for many homebuyers, PMI is an affordable and feasible option that makes homeownership possible.
If you are ready to buy a home — but don’t have a 20% down payment for a conventional mortgage loan — PMI might be a helpful solution for your situation.
Think of it this way: when homes are increasing in value, you could choose to buy a house now (with a mortgage that includes PMI payments) and start building equity for the future. Or you could wait to buy a home until you have a full 20% down payment saved; but if that’s months or years from now, you could end up paying a much higher price for the home itself.
So, it’s important to weigh the pros and cons of PMI; even if you’re paying that additional amount each month, it could end up saving you money in the long run. Plus, PMI is temporary. When you’re able to cancel it, you won’t have that additional cost anymore.
If you don’t have much money saved for a down payment, you may also want to consider other non-conventional mortgage types that require smaller down payments. If you’re a first-time homebuyer, you may also qualify for down payment assistance (DPA) programs.
Of course, everyone’s situation is unique. If you still have questions about conventional loans, PMI, or other mortgage-related inquiries, be sure to contact your loan professional for additional information.
