Demystifying Private Mortgage Insurance (PMI): What You Need to Know

What is Private Mortgage Insurance?

Historically, being able to provide a 20% down payment when purchasing a home has been a difficult hurdle for many a prospective home buyer. Mortgage Insurance, also known as MI, or PMI has helped many people overcome that obstacle.

MI is typically required for home loans that have a down payment that is less than 20% of the property value. It is essentially an insurance policy for the lender, reducing the amount of potential loss if the borrower doesn't repay their loan.

How Does Mortgage Insurance help?

MI gives you more flexibility by enabling you to choose a home from a wider range of prices. For example, let's say you have $20,000 saved for a down payment. Without MI, you could put that $20,000 down on a $100,000 home. With MI, that same $20,000 could be a 5% down payment on a $400,000 home- assuming that you can afford a higher monthly payment that would go along with a higher home price.

MI also frees up the money you have worked so hard to save for, so that it can be reserved for unforeseen expenses or needs for the new home i.e, furniture, appliances, renovations.

PMI FAQs

Some frequently asked questions regarding PMI include the following:

• How is PMI calculated?
• There are many factors that go into calculating MI, such as credit history for the borrower, how much is the down payment, terms of the loan, etc., MI costs will vary.
• How do I get rid of MI?
• There are several ways to get rid of MI, among them are: paying down the principal balance sooner, being aware of if your property value increases to a point where your mortgage is now 80% the value of the property, etc. Reaching out to your lender regarding financing options and inquiring about canceling your MI are easy ways to navigate removal of MI.
• What if I just wait and keep saving?
• While many would error on the side of waiting and saving, with markets being unpredictable, you run the risk of actually having to pay even more when you are finally ready to buy a home. With current home prices increasing, and interest rates continuing to rise, your window to purchase a home you can comfortably afford gets smaller and smaller. Speaking with a reputable and knowledgeable lender will help set your mind at ease when you are ready to purchase a home.

Still have questions?

Reach out to Lori with any questions or concerns you might have regarding next steps to take if you're interested in what PMI can do for you.