Your Guide to Private Mortgage Insurance
| Posted in News, Home Loans
For many aspiring homeowners, purchasing a house is a significant milestone that marks a new chapter in their lives. Throughout the process of buying a home, there are many things to learn including terms you may have never heard of, or items you did not consider. One in particular is Private Mortgage Insurance (PMI). Whether you're a first-time buyer or a seasoned homeowner, we’ll arm you with the knowledge and support you need to make informed decisions and navigate Private Mortgage Insurance with confidence.
What is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is a type of insurance policy that is often required by lenders when there is a less than 20% down payment on a home. The goal is to protect the lender while still offering you options for a home mortgage. PMI is not permanent and there are options to remove PMI requirements once you own at least 20% equity in your home.
Why Do I Need PMI?
In some cases, you wouldn’t be able to finalize a mortgage without having PMI. Specifically, when there is less than a 20% down payment. With less equity in the property, there is higher risk, so the lender requires protection. PMI is a safeguard for the lender. Should the borrower default on their mortgage, the PMI policy would compensate the lender. This is a requirement to protect the lender, while still being able to support you, the borrower, in your home buying journey.
Benefits of Private Mortgage Insurance
While PMI is an extra cost to owning a home, there are benefits of private mortgage insurance too.
- PMI allows you to purchase a home with a smaller down payment. This is particularly beneficial for first-time home buyers who have little to no equity or a smaller down payment saved.
- Shorten the time to home ownership. Saving for a 20% down payment can take years. PMI offers you the opportunity to purchase a home quicker with the relief of a lower down payment.
- It’s not permanent. In many cases, once you own 20% equity in your home, you can work alongside your lender to remove PMI.
How Much is Private Mortgage Insurance?
The cost of PMI varies and is based on several factors. However, the higher your down payment and credit score is, the lower your cost of PMI will be. A few factors that go into the cost are:
- Size of your down payment.
- The type and amount of your mortgage.
- Credit Score.
- Interest rates - this can vary depending on the provider.
- Lender requirements.
Keep in mind that PMI is typically required until your loan balance reaches 78-80% of the original appraised value of the home and not the purchase price. Increasing equity in your home can happen over time with appreciation, making mortgage payments, or making updates to your home to increase its value.
In the end PMI is here to give you a way to purchase a home with a lower down payment, while still protecting the lender. We’re happy to answer any other questions you may have about Private Mortgage Insurance, or any other mortgage topic, just reach out!
