What is Private Mortgage Insurance (PMI)?
10 min read
Of all the things we do in life, coming up with a down payment might be one of the hardest. Homeownership is a goal for a lot of people, but you might ask: How does someone save a 20% down payment?
Even if you keep it simple with a $200,000 mortgage, that’s $40,000 you’ll need to save!
It’s a big number, so yes, buying a home might feel out of reach.
But thanks to a little thing called private mortgage insurance, or simply PMI, most people don’t need tens of thousands of dollars for a home.
What exactly is private mortgage insurance?
When you hear the word “insurance,” you might think of a policy that protects you in some way.
But that’s not exactly how PMI works. Oddly enough, even though you’re paying it—it doesn’t protect you.
This insurance protects your mortgage lender and it’s typically required when buying a house with less than 20% down. Life happens, so if you default on your mortgage and can’t repay, PMI reimburses your lender.
Yes, it’s an added expense. But rather than think about it this way, consider it a small price for the convenience of being able to buy with less money.
Even though PMI is specific to conventional loans, FHA and USDA loans have a form of mortgage insurance too.
How to get rid of private mortgage insurance?
Mortgage insurance can increase your monthly payment by $100 to $200, which of course, isn’t the greatest news.
It’s understandable why it might leave a bad taste in your mouth, but it’s really not that bad. And guess what? It’s not permanent either!
The upside is that mortgage lenders often waive PMI once a property has 20% to 22% equity The downside is that unlike a conventional loan, mortgage insurance with a government loan is for life.
But don’t let that discourage you. You can refinance an FHA or USDA loan once you have 20% equity and kiss mortgage insurance goodbye!
Don’t let a down payment stop a home purchase. It can take years to save 20% down, but with mortgage insurance you don’t have to.
To learn more about mortgage insurance and different home loan options, contact the loan experts at Real Genius.