If you’re planning to buy a home, it’s important to count the cost. You may have heard of the term “PMI” and wondered how it will affect your budget. So, what is private mortgage insurance and is it really necessary? What does PMI cost, and can it benefit you, the buyer? Let’s discuss!
What is Private Mortgage Insurance
Private mortgage insurance, often referred to as “PMI,” is a lender surcharge for buyers who make a down payment of less than 20% of a property’s cost. Private mortgage insurance protects lenders and mitigates risk in the case that a borrower defaults on their mortgage payments.
Many people ask if private mortgage insurance is necessary. While buyers are used to procuring homeowner’s insurance to protect their own investment, it's important to note that PMI protects the lender—not the buyer, nor the home itself. So, most lenders require PMI in situations where a borrower finances more than 80% of a home’s value.
However, PMI doesn’t just benefit the lender—it enables borrowers to secure a mortgage with a lower down payment. So, if you’re struggling to save money, PMI can help you out.
What to Know About the Cost of PMI
Typically, PMI is divided into a monthly premium and added to a mortgage payment. However, some lenders require the cost of PMI to be paid at closing, either in part or in full.
The exact cost varies based on factors like credit score and loan-to-value ratio. The loan officer will coordinate with a private mortgage insurance company, and the borrower will have an opportunity to review the terms of the policy before agreeing to anything.
Most loan officers estimate PMI to cost between 0.5% and 2% of the original loan amount, though it can vary higher or lower depending on an individual’s financial circumstances. Keep in mind, once a buyer has built sufficient equity in the home (or reached a loan-to-value ratio of 80%) they are usually able to cancel the PMI.
Private Mortgage Insurance—Transforming Homeownership Dreams into Reality
While private mortgage insurance increases monthly expenses at first, it benefits many buyers in the long-term. PMI helps borrowers achieve their goal of homeownership sooner. In a competitive market, you don’t have time to wait once your dream home is listed. PMI might just be the solution you need.
Check out our mortgage blog to learn about applying (and qualifying) for loans, home-buying mistakes, and more.
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