Is PMI worth it? Costs and Benefits of Mortgage Insurance
Many homebuyers are already familiar with Private Mortgage Insurance (PMI). PMI is a type of insurance on your home loan that is usually put in place when the borrower does not put 20% of the home’s value down at the time of purchase. PMI can also apply when refinancing, if the borrower has not yet accrued 20% of the home’s value in equity.
With all the other expenses that go into closing on a home and keeping up with monthly payments, it’s easy to understand why some homebuyers might hesitate to take on the added expense of PMI. Nevertheless, PMI can be an invaluable tool for homebuyers in certain situations, giving you the ability to finance a home without the need for a hefty down payment. To understand the possible drawbacks and benefits of PMI, let’s take a deeper look into what this type of insurance involves.
Who benefits from PMI?
Unlike your homeowner’s insurance, PMI covers your lender if you were to default on your mortgage. This means that the lender is the beneficiary of the insurance, and is protected from the higher risk associated with lending to a borrower with a lower down payment. Though the issuer of your mortgage would receive funds from PMI if you should fail to make your monthly payments, the borrower also benefits from obtaining PMI. For a relatively low monthly payment, PMI lets you get into your desired home right away, eliminating the need to save up a large sum for a down payment.
How much does PMI cost?
The cost of PMI varies significantly from one transaction to another. Factors such as the purchase price of the home and down payment amount will affect the amount that a borrower pays for PMI. On average, these payments are around $30 to $70 per month for every $100,000 borrowed. This makes PMI an attractive choice for many borrowers who wish to enter into a mortgage before accumulating enough savings for a down payment.
Does PMI ever go away?
It will not be necessary to carry PMI for the entire duration of your home loan. In fact, there are several reasons why PMI may end before your home is paid off. Under the HPA, your lender must drop your PMI once your mortgage balance reaches 78 percent of the original purchase price—as long as you haven’t missed any payments and are still in good standing. Lenders are also required to stop PMI at the halfway point of your amortization schedule (i.e., year 15 on a 30-year loan). Finally, you can refinance to get rid of PMI once you have achieved 20% equity in your home.
PMI might sound like another unwanted expense, but for many it’s a crucial tool for purchasing a home. PMI allows borrowers to begin building home equity without the need for a substantial down payment. If you have any questions about PMI or any aspect of the lending process,
