What is Private Mortgage Insurance?

What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) ExplainedIt might seem like a monthly mortgage payment is just one lump sum that goes toward the balance due, but in reality, many mortgages are actually made of multiple smaller payments toward various items. Sometimes they include home insurance payments or funds for an escrow account, while others have something called PMI to pay toward. 

Called private mortgage insurance, it’s a common payment that’s included when less than 20 percent is put down on a home and is an important piece to consider when figuring out an overall budget.

The Basics Of PMI

Private mortgage insurance is a fairly common element of a mortgage and is often present in the terms for first-time homebuyers. Let’s examine what this payment is a little more closely and why it’s needed.

PMI is usually something that’s in the best interest of the lender rather than the borrower, as it acts as a sort of guarantee. Lenders view a 20 percent down payment as sufficient in terms of how serious buyers are on keeping their home, where those who put down less money are viewed as a bit more of a risk. This risk is mitigated by paying PMI, so that if a homeowner stops paying their mortgage, at least the lender got a little more money back than they would have otherwise.

The amount of private mortgage insurance paid per month depends on one’s credit score, again pointing to the lender’s view of risk, and usually runs anywhere from 0.3 percent to 1.5 percent of the loan amount. In real terms, this can be as low as only $100 per month or even less, but it’s still an important figure to account for.

Private Mortgage Insurance Myths

Opinions on PMI seem to be quite polarized, as some say that it should be avoided at all costs while others think it’s not all that bad. The truth is, PMI might serve some people just fine while it could be a detriment for others.

Some lenders allow homeowners to cancel their PMI once they have 20 percent equity in their homes, yet some people experience a very difficult time actually canceling it. Be sure to check with your specific lender before making your purchase, as some might require you to pay PMI for the life of the loan.

Paying $100 per month or so may not be a big deal, and many times it’s worth it if someone wants to purchase property but doesn’t have 20 percent to put down. However, when the math is done, avoiding PMI could save someone tens of thousands of dollars over several years, so it ultimately depends on what works best in your situation.

There Are Multiple Options

Paying private mortgage insurance isn’t required just to get a foot into homeownership, but it is a common element in many mortgages that might be necessary. Some may take advantage of it in order to get into one of the desirable homes in Ham Lake, for instance. Be sure to do some research and figure out what financial options work best before making a decision. Paying PMI might not phase you while for others it’s worth it to save up a sizable down payment first.

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