Private Mortgage insurance (PMI)
Private Mortgage Insurance (PMI) is a type of insurance that protects the lender in case the borrower defaults on their mortgage payments. It’s usually required for conventional loans when the borrower’s down payment is less than 20% of the home’s purchase price.
PMI allows borrowers to obtain a mortgage with a lower down payment, but it adds an extra cost to their monthly mortgage payments. Once the borrower’s equity in the home reaches 20% (either through payments or appreciation of the property), they can typically request the lender to cancel the PMI.
The cost of PMI can vary depending on factors such as the loan amount, down payment percentage, and the borrower’s credit score. It’s important for borrowers to understand the terms and costs associated with PMI when considering their mortgage options.
PMI is recommended for
First-time homebuyers
Many first-time buyers may not have accumulated enough savings to make a substantial down payment, so PMI can enable them to purchase a home with a smaller initial investment.
Borrowers with limited savings
Even for those who have a stable income but haven't been able to save a significant amount for a down payment, PMI can make homeownership more accessible.
Borrowers who prefer to keep savings invested
Some individuals may have savings invested in assets with higher returns than the potential savings from a larger down payment. In such cases, they might opt for PMI rather than liquidating those investments.
Those seeking to enter the housing market quickly
PMI can expedite the homebuying process by allowing borrowers to purchase a home sooner, without waiting to save a larger down payment.
It’s essential for borrowers to carefully weigh the cost of PMI against the benefits of homeownership and consider how it fits into their long-term financial plans. Additionally, borrowers should explore alternatives to PMI, such as government-backed loans (like FHA loans) or lender-paid mortgage insurance, which might offer different terms and conditions.