Private Mortgage Insurance Explained

October 4, 2018

 

Several people have asked me about Private Mortgage Insurance over the last couple of weeks so I thought it would be a great topic for this week’s Real Estate Tip of the Week.

 

First off, what is private mortgage insurance (PMI)?   Private mortgage insurance is a type of mortgage insurance that a buyer might be required to pay if they have a conventional loan.  PMI is designed to protect the lender if the homeowner stops making monthly payments on the loan.

 

Typically, PMI is usually required when you have a conventional loan and your down payment is less than 20% of the home’s purchase price.  PMI usually ranges from 0.5%-1% of the loan value.  So for a $500,000 home, it could be anywhere from $2,500-$5,000/year. 

 

A borrower can either pay it up front, pay it monthly, or a combination of the two options.  Once the borrower acquires 20% equity of the property, they can request for the PMI to go away.  It automatically terminates once the 22% equity is reached.  One positive aspect of PMI is that it is tax deductible.

 

PMI can be reason why most people think they need to have 20% down when buying a home.  However, a lot of lenders offer conventional loans with smaller down payments like 5% or 10% that do not require PMI.  Typically, those loans will have a higher interest rate which may be more or less expensive than PMI depending on some factors like how long you plan to stay in the home.  There are also certain loans like a VA loan where you do not have to pay PMI even when you have a 0% down payment.

 

So the bottom line about PMI is that you should talk to lender/mortgage professional about your financing options.  There are so many loan programs now that home buyers have a lot of options.  Buying might be more of an option than you think!  If you have questions about PMI or would like to learn more about mortgages, contact me at Blake.Davenport@longandfoster.com and I can happily connect you with a trusted mortgage professional.

 

 

 

 

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