If you've been saving up for a home, you might have found yourself in a common situation where you have a good amount of your down payment saved, but it’s still not quite 20%. The good news is that you don’t have to wait until your down payment is quite where it needs to be.
Private Mortgage Insurance (PMI) is your solution to getting into that home sooner. It is often misunderstood, but once you understand how it works, it becomes clear that it can be the key to homeownership.
Let’s take a closer look at what PMI is, why it’s required, and how it benefits you as a buyer.
Private Mortgage Insurance
Private Mortgage Insurance, or PMI, is insurance that protects the lender, not the borrower. When you don’t have a 20% down payment to offer, your mortgage is considered a higher risk for the lender. PMI lowers that risk by ensuring that if something goes wrong, the lender is covered.
But while PMI benefits the lender, it also benefits you. Without it, many lenders wouldn’t approve loans for borrowers with smaller down payments. PMI makes it possible for more people to become homeowners, without waiting for years to save up a larger down payment.
How Does PMI Work?
Once you’re approved for a loan with a down payment of less than 20%, you will be required to pay PMI.
1. Monthly Premiums
This is the most common option. You pay a monthly fee on top of your mortgage payment depending on your loan size and the amount you’ve put down.
2. Upfront Premium
In some cases, PMI can be paid in full as an upfront fee when you close on the home. This may reduce your monthly mortgage payment, but it requires a larger upfront cost.
3. Combination of Both
Some mortgages offer a mix of upfront premiums and monthly payments, which gives you more flexibility. Once your mortgage balance reaches 80% of your home’s value, you can request that the lender remove PMI, saving you money in the long run.
When Can You Stop Paying PMI?
PMI is not forever. Once you’ve paid down your mortgage enough to reach 20% equity in your home, you can request that it be removed from your monthly payments.
This could happen faster if your home’s value increases or if you pay down your mortgage quicker. So, while PMI is an extra cost at the beginning of your homeownership journey, it’s a temporary expense that can be eliminated once your loan balance decreases.
