What Is Private Mortgage Insurance “PMI”?
Private mortgage insurance (PMI) is a type of insurance that a borrower might be required to buy as a condition of a conventional mortgage loan. Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price.
Unlike most types of insurance, the policy protects the lender’s investment in the home, not the individual purchasing the insurance. However, PMI makes it possible for some people to become homeowners sooner rather than later. For individuals who elect to put down between 3% to 19% of the home’s cost, PMI allows them the possibility of obtaining financing.
However, it comes with additional monthly costs. Borrowers must pay their PMI until they have accumulated 20% or more of their equity in their home. That way, the lender no longer considers them a high-risk.
How much is mortgage insurance?
PMI costs can range from 0.25% to 2% of your loan balance per year, depending on your down payment, loan program, and the borrower’s credit score. Because “PMI” is a percentage of the mortgage amount, the more you borrow, the more “PMI” you will pay.
Yes, PMI is an added expense, so is continuing to spend money on rent and possibly missing out on this market appreciation as you wait to save up a larger down payment. There is no guarantee you will come out ahead buying a home later rather than sooner. So, the value of paying “PMI” is worth considering. If you have any questions regarding PMI or how to get your homeownership journey started, give us a call or schedule a free consultation with our team. We would love to help you achieve your homeownership dream.
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