What Is PMI?

As you look into financing options for purchasing a home, you might see something called PMI being calculated into your costs. PMI is “private mortgage insurance.” If you are a first time home buyer especially, it’s difficult to come up with the funds for a 20% down payment. PMI is a lender’s protection and compensation for taking a risk on a buyer with a smaller amount of money to put down. PMI costs between 0.5% and 1% of the mortgage annually, and insures the difference between 20% equity and the smaller percentage the buyer put down, in case the lender has to foreclose on the home.

Conventional Loans and PMI

There are advantages to buyers for loans that require PMI. Primarily, it allows buyers to get into a home without having 20% down. Once you have made enough payments on your home over time to get to the point where you have 20% equity, the PMI payment goes away. Keep in mind that you will likely need to inform your mortgage holder that you reached the 20% mark in equity, as most mortgage holders won’t automatically remove it.

The disadvantage of PMI is the cost. You will have an added expense every month in addition to your mortgage. The best way to handle a loan with PMI is to try to pay extra towards the principal of your mortgage per month to try to gain equity as quickly as possible. If your current loan has PMI included, and you are curious if you are at the 20% equity mark for your home, reach out to us and we can help you figure out your home’s current market value. 

What About FHA and VA Loans?

PMI works differently depending on the type of loan. If you use an FHA loan, PMI can last for 11 years, or possibly for the life of the loan. This is important to consider when looking at different loan programs and terms. VA loans, however, do not require any down payment and there is no PMI.

There are many things to consider when purchasing a home. Your financing options are one of the bigger pieces of the puzzle because you don’t want to put yourself in a position where you are financially strapped, or get yourself into a 30 year mortgage that turns out to be too much for your comfort level.

PMI can be a very useful resource as it gives more people the ability to become homeowners. Just make sure you consider the long term effects of the loan program and PMI. If you’d like to speak with someone about home financing options, we would be happy to connect you with some lenders that we know and trust. Reach out to us here and we’ll help you get started!