What is private mortgage insurance (PMI)? Why do I need it? I will hear from clients that they do not want PMI. I can understand that, but depending on the type of loan you have, you may need it.
PMI allows you to get a conventional mortgage with less than 20% down. There are different ways to pay for mortgage insurance – it can be paid monthly by the borrower, one time up front by the borrower or by the lender or split between monthly and a one time fee. Many do monthly premiums that are part of your monthly payment. Some will look at a lender paid premium – typically that involves a higher interest rate. There is also a single premium that can be paid at closing by the borrower. Some choose to do a lower monthly payment and a smaller single premium combination.
There are some benefits to mortgage insurance. The biggest benefit is that you can buy a home with less than 20% down. Your monthly premium may be tax deductible – check with your tax accountant to see if you can deduct that part of your payment. Another thing to consider is that by putting less money down, you can keep some reserves to help offset any repairs you need to do to the home. It also will allow you to keep some extra savings in case of an emergency.
You can eliminate mortgage insurance after you have had your loan for a couple years. If you have made principal reductions or paid your mortgage down to 78% of the original balance, you can ask your lender to stop collection PMI after two years. After five years, you can have an appraisal done to see if you are under 80%. If you do nothing, your PMI will go away after your pay your mortgage down to 78% of the original balance – typically that will take you about 10 yrs.
Don't be afraid of mortgage insurance – it can help you buy a home sooner than you may have expected!