What is PMI? Do I need to take a pill?
Private Mortgage Insurance (PMI)
Actually, no. That’s because PMI stands for Private Mortgage Insurance. PMI is an insurance policy that will protect the lender if you don’t pay your mortgage. Yes – you read that properly. You, as the buyer, will pay insurance that pays the lender if you default.
You see, lenders want to see an initial equity of at least 20% of the purchase price. If you put down 20% in cash, you won’t pay PMI. However, if you put down less than 20%, they are at a risk of loss. Now, this may leave a bad taste in your mouth, but if you don’t want to pay PMI, but down at least 20%.
How is PMI paid?
It’s paid monthly as part of your mortgage payment. It is required for a conventional loan that has a down payment of less than 20%. If it’s FHA financing, it’s also paid monthly, but it has a different name.
Will you need to pay them PMI forever? No. The equity in your home reaches 20% of the value, you can cancel your PMI and stop making that payment as part of your mortgage payment.
This is insurance that you have the privilege of paying. However, the lender of your mortgage is the one who will receive the payment if it ever needs to be used.
How Much is PMI?
The cost of PMI varies. It’s based upon your loan-to-value ratio and your credit score. Expect to pay somewhere between $30 and $70 per month for every $100,000 that is borrowed.
PMI is important since the average down payment for all buyers last year was 10%,. For first time buyers the average was 6%. This shows that a large number of buyers were required to pay PMI . But it did not stop them from going ahead and purchasing their dream homes.
For more details, speak with your mortgage rep.
When you’re ready to either buy or sell a home, contact us.