If you’re in the middle of the home buying process, you’ve likely had the term “private mortgage insurance” come up in conversation. This is something you may or may not need for your home loan and works similarly to other types of mortgages.
In this case, you are insuring the mortgage in the event that you were required to by your lender typically due to putting down less than 20% at the time of down payment. Take a look below to get a better understanding of private mortgage insurance and if this is something you’ll want on your home.
What is PMI?
PMI is the shortened term for private mortgage insurance, a mortgage insurance you’ll pay on a conventional loan in order to protect the lender. The lender will arrange the private insurance with a private insurance company and require it of you on a conventional loan when you pay less than 20% of a down payment on the home purchase price.
This is something that can help you qualify for a loan you may not otherwise be able to get but at the cost of an increased loan cost and no protection. They aren’t always required on loans with a smaller down payment, but in these cases may have a higher interest rate, forcing potentially borrowers to determine if it’s more expensive to get a PMI or to pay the higher interest rate. Not paying your PMI payments can cause you to foreclose on the home.
How do you pay for it?
If you end up with a PMI, you’ll may for it as a monthly premium added to your mortgage payment. You may also pay an up-front premium at closing, but in the event of moving or refinancing, you may not be get a refund on the premium. You could also pay both an up-front and a monthly, depending how many options your lender gives you, and you can decide what type of timeframe makes the most sense for your situation.
Should I get a loan that requires PMI?
When you buy a home, you should ideally have enough to pay the 20% down payment. When you can’t make the 20% down payment, your lender will likely require a PMI before they will sign off on the loan. This is because you are a riskier borrower at less than 20% down, and they need a way to protect themselves. While it sounds like a great shortcut to owning your dream home sooner or perhaps it’s the only way to get in your first home as a new buyer, you should avoid getting a PMI.
The downside to PMI
You can avoid paying PMI by putting down your 20% down payment or trying to get a piggy-back mortgage as a risky option with adjustable rates and balloon provisions. This works in which you take out one loan at 80% of the property value, one at 10% of the value, while you fund the other 10% as your down payment. The best route is to save the 20% down or get a more affordable property that you can reasonably pay the 20% down. Otherwise, you’ll be dealing with the drawbacks to PMI.
With a PMI you’ll have to worry about making payments sometimes past the 20% threshold, depending on your contract with the lender, while the cost alone could be a couple hundred dollars each month that could be going to something else in your life.
These types of insurance plans are hard to cancel and are no longer tax deductible. In addition, your PMI will not benefit your heirs in the event of your death and you’ll lose out on all of the money you could be earning on that money had you invested it into a mutual fund.
If you’re trying to qualify for a loan you may not be able to get otherwise and don’t mind the increased cost of the loan, you may find a PMI to be beneficial. Ask your lender about a conventional loan with a smaller down payment that won’t require a PMI to avoid some of the downfalls that come with mortgage insurance.
Remember that these protect the lender more so than you, but do give you an option if you can’t afford a full 20% down payment and want to get into a home sooner. This is a more expensive way to get into a home but you can always wait until you have the full down payment or get a less expensive home.