What is PMI and When Do I Need It?

If you have purchased a home, you probably remember the added expense of homeowner’s insurance that was required. But did you know there is another type of insurance that buyers can be required to pay?


A Basic Understanding

You may have heard an agent mention PMI before and might be wondering what that is. PMI is short for private mortgage insurance, is sometimes required that the buyer purchase when they purchase a home, and essentially is protection for the lender in the instance that one defaulted on the mortgage. PMI typically costs a borrower 0.58 percent to 1.86 percent of the original loan amount, which means most borrowers end up paying $30 to $70 for every $100,000 borrowed every month. This may not sound like a lot at first but can really add up quickly. Now PMI is not always required, and in fact a buyer can avoid PMI and the following will explain how.


How to Avoid Paying PMI

If you’d rather spend your hard-earned money on anything other than giving your lending institution a little bit of cushion in the event you aren’t able to pay your mortgage, we don’t blame you. To avoid paying PMI is rather simple, however may not exactly be easy for some. In order to not be required to purchase PMI, you will need to have a 20% down payment when you purchase the home.

If 20% down is not possible, that’s okay. The good news is, PMI does not stick with you forever. If you come in with less than 20% down, once you reach 20 percent equity you can contact your lender to have PMI removed from your mortgage. You can get to 20% equity by paying down your loan balance or through home values increasing.

Another important factor to be aware of – if you have an FHA loan, PMI will remain in place for the life of the loan. This is the exception, in that it doesn’t matter how much equity you gain, the PMI does not go away. However, one option to consider at that point would be to refinance your loan to a conventional loan to eliminate paying PMI. If you purchase a home with an FHA loan, once you get to 20% equity, reach out to a lender to see if it would make sense for you to refinance at that point.


It’s Not All That Bad

Yes, PMI is an additional expense that to many may seem kind of silly. But look at it this way, this added protection gives lenders the ability to finance loans that seem a little bit risky. This means homebuyers can get into a house with less than perfect credit and with a smaller down payment amount. The truth is the amount of money you will be making in the form of equity, far outweighs the amount of money you will have to pay in PMI.


So where do you go from here? First, be sure to keep your eye on home values. Especially if you have purchased a home in the last few years and currently paying PMI. Home values have increased significantly in the last year, so there’s a chance you already have 20% equity and could possibly get that additional fee removed.


Whether you are a first time homebuyer or you're ready for a bigger home and you've decided to sell,
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