Blog > What is PMI (Private Mortgage Insurance) and should you avoid it?
As a mortgage borrower, you might have heard of the term “PMI” or “private mortgage insurance.” It is a mandatory expense for some borrowers who do not have a 20% down payment. In this article, we will explore what PMI is, how it works, its benefits, risks, and alternatives. We will also provide advice for borrowers who are considering PMI or alternative options.
How PMI Works
Private mortgage insurance (PMI) protects the lender in case the borrower defaults on their mortgage. PMI is required when the borrower puts down less than 20% of the home’s purchase price as a down payment. If the borrower defaults on their loan, PMI pays a portion of the outstanding balance to the lender.
When PMI is required, the borrower pays a monthly premium. The premium amount varies depending on the loan size, down payment amount, and credit score. The PMI premium can be added to the borrower’s monthly mortgage payment or paid upfront.
PMI is typically required until the borrower’s equity in the home reaches 20%. At this point, the borrower can request to have the PMI removed.
Benefits of PMI
PMI can make home ownership more accessible for borrowers who do not have a 20% down payment. Without PMI, lenders may not be willing to approve the loan or may require a higher interest rate.
PMI also helps borrowers build equity in their homes. By making regular mortgage payments, the borrower’s equity in the home increases. Once the borrower’s equity reaches 20%, the borrower can request to have the PMI removed, which can save them hundreds of dollars per month.
Lastly, PMI can be canceled or terminated once the borrower’s equity reaches 20%. This means that the borrower can save money on their monthly mortgage payment in the long run.
Risks of PMI
One of the biggest risks of PMI is that it can increase monthly mortgage payments. This can make the cost of home ownership more expensive for borrowers. Additionally, PMI premiums are not tax-deductible, which means that borrowers cannot deduct them from their taxes.
Another risk of PMI is that it can be difficult to cancel in some cases. For example, if the borrower has a poor payment history, the lender may not be willing to remove the PMI. Additionally, if the home’s value has decreased, the borrower may not have enough equity to remove the PMI.
Lastly, PMI may not protect borrowers from foreclosure. If the borrower defaults on their loan and the home is foreclosed, the lender may not recover the full amount of the outstanding balance from the PMI provider. This means that the borrower may still owe money even after the foreclosure.
Alternatives to PMI
There are several alternative options for borrowers who want to avoid PMI. One option is to make a larger down payment. By putting down 20% or more, the borrower can avoid PMI altogether. However, this may not be feasible for all borrowers.
Another option is to take out a second mortgage or home equity loan. This allows the borrower to avoid PMI by borrowing the additional funds needed for the down payment. However, this option may come with higher interest rates and fees.
Lastly, some lenders offer “lender-paid PMI” or LPMI. With LPMI, the lender pays the PMI premium in exchange for a higher interest rate. This can make the cost of PMI more manageable for borrowers.
Conclusion
PMI is a mandatory expense for some borrowers who do not have a 20% down payment. While PMI can make home ownership more accessible and help borrowers build equity in their homes, it also comes with risks and costs. Borrowers should carefully consider PMI before committing to a mortgage and explore alternative options if possible.
If you are considering PMI or alternative options, it is important to do your research and consult with a financial advisor or mortgage professional. By understanding your options and making an informed decision, you can save money and make the most of your home ownership experience.
Contact Us:
If you have any questions or need assistance with your mortgage, please contact us today. We know the best lenders that provide exceptional service and make sure you save the most money possible when purchasing.
P: 512-308-3244