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PMI 101
Learn more about this mortgage opportunity

A big part of the American dream is owning a home, but finding the money for a sufficient down payment can be a struggle. You might be able to obtain a home loan with a lower down payment thanks to private mortgage insurance. This tool can help you buy a home faster, but it’s not without its costs.

What is it?

When you get ready to buy a home, many advisors suggest that you pay 20 percent of the overall cost as a down payment. As housing prices rise, this can be a substantial barrier to home ownership, especially if you’re a first-time buyer without money from the sale of a previous property. With the right credit history, you can still buy a home without as much cash, but it makes the loan riskier for your lending institution. That’s where private mortgage insurance assists.

As the name implies, PMI is an insurance policy that covers a conventional loan, as explained by the Consumer Financial Protections Bureau. Lending institutions usually attach PMI to loans with less than a 20-percent down payment, and the premium typically costs anywhere from 0.25-2.0 percent of your loan balance per year, according to Amy Fontinelle of Investopedia. This is on top of what you owe the lender for balance and interest.

While a lot of the insurance you buy protects you, PMI protects your lending institution. Since you put down less on the purchase of the house, your lender is more invested in your property than usual. If something happens and you can’t make payments, it needs the insurance to minimize the amount of money it loses.

How do you pay for it?

There are several ways to pay for PMI, and your lending institution will discuss your options with you. The team at Zillow reports that there are two common methods: lump sum and monthly. Most often, you will pay mortgage insurance premiums monthly with the mortgage payment for your current loan, and your lender is responsible for separating the premium payment from the pile and sending it to its insurer. Some lenders offer a lump sum option that lets you pay for your PMI up front. This is either with cash when you close on the home or then added to your financing package total.

Can you get rid of it?

While PMI is a great way to jump into home ownership earlier, it is an additional bill each month. Once you have paid enough on your home to own 20 percent equity, Elizabeth Weintraub of The Balance reports that you might be able to stop paying monthly for PMI. Before you change the payment headed to the lending institution, you need to call them and ask how to cancel the PMI policy. It might take a while to get PMI taken off your mortgage, as the lender will want an appraisal to confirm that you have more than 20 percent equity in your property, which you will have to pay for. In the end, it’s extra money in your pocket to do the legwork to cut out unneeded insurance.

If you are ready to leap into home ownership but the cost of living in your area is high, talk to your lending institution about your mortgage options and private mortgage insurance.

Published by East Boston Savings Bank
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