When you get ready to apply for a loan to buy a home or refinance your current mortgage, you're going to notice many unfamiliar terms popping up throughout the process. Don't stress!
In this series - we're giving you easy answers to your FAQ's so you feel confident and educated as you navigate the home mortgage process.
Today's frequently asked question
🏦 What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance, commonly referred to as PMI, is a type of insurance that protects lenders in case a borrower doesn't make their mortgage payments and defaults on the loan. PMI insures the lender against financial loss which lowers the risk of the loan.
Keep in mind - Private Mortgage Insurance does not provide any protection you the homeowner.
💼 When do you need PMI?
PMI is typically required by lenders when a homebuyer makes a down payment that is less than 20% of the home's purchase price. Lenders view borrowers with lower down payments as riskier investments, because they have less equity in the property. PMI provides a layer of protection for the lender in the event that the borrower is unable to make their mortgage payments and the home goes into foreclosure.
🛠️ How does PMI work?
If you are applying for a home loan with a down payment of less than 20%, your lender will likely require you to obtain PMI. The cost of PMI can vary depending on factors such as the size of your down payment, your credit score, and the type of mortgage you will have. PMI premiums are typically added to your monthly mortgage payments, making your overall payment higher. Keep in mind that you are putting less than 20% down so this may be a better option for your short term goals. PMI is a great tool that eliminates the need to wait to buy a home until you have 20% down payment.
⚠️ How to avoid PMI?
While PMI can be a necessary expense for some homebuyers, there are ways to avoid it altogether:
Make a Larger Down Payment: Saving up for a larger down payment can help you avoid PMI altogether. By putting down 20% or more of the home's purchase price, you demonstrate to lenders that you are a lower-risk borrower, eliminating the need for PMI.
Look Into Lender-Paid Mortgage Insurance (LPMI): Some lenders offer LPMI options, where they pay for the PMI upfront in exchange for a slightly higher interest rate on the mortgage. While this can be an attractive option for some borrowers, it's essential to carefully consider the long-term implications before choosing this route.
Remember - PMI is not "terrible." It is intended as a helpful option for homebuyers who do not have the required 20% down payment for the home value.
Final Takeaway
Private Mortgage Insurance (PMI) plays a significant role in the homebuying process, particularly for those making smaller down payments. By understanding what PMI is, when it's required, and how to avoid it, first-time homebuyers can make informed decisions that align with their financial goals. Whether you opt to secure a conventional loan with PMI or explore alternative options, such as increasing your down payment with gifts from family members or employers, being aware of your choices is key to achieving successful homeownership.
And of course, you can always ask me questions at toni (at) toniryan.com
ABOUT THE AUTHOR
Toni F. Ryan | NMLS#230507
Senior Loan Officer | Peak Residential Lending
Toni F. Ryan has over 25 years experience in mortgage lending - both on the wholesale and retail levels. She believes that education is key to making the best decision for YOU! She shares her insight into the lending world here and encourages your feedback. Don't forget to connect on Facebook - Instagram and TikTok