As the first post in the First Time Home Buyer Series, I want to address the initial question clients always have when looking to get a mortgage: What is private mortgage insurance?
Private mortgage insurance, PMI, is a type of mortgage insurance from private insurance companies used with conventional loans. Similar to other kinds of mortgage insurance policies, PMI protects the lender if you stop making payments on your home loan. PMI can be arranged by the lender and provided by private insurance companies.
So, what is PMI? The ultimate catch 22**
Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price – or, in mortgage-speak, the mortgage’s loan-to-value (LTV) ratio is in excess of 80% (the higher the LTV ratio, the higher the risk profile of the mortgage) – https://www.investopedia.com/mortgage/insurance/
While it helps borrowers attain a loan with a lesser down payment & potentially become a home owner sooner, its purpose is to protect the lender. Important to note: Similar to interest, property tax, and homeowners insurance, payment of your PMI does not build equity in your home.
You may be thinking that buying insurance on your mortgage may sound a little strange, but it protects the lender’s investment in the home. While yes… it’s another fee you need to pay, it’s advantageous to homeowners as it makes home affordability a reality sooner.
- PMI isn’t just for people who can’t afford a 20% down payment. It’s also for people who don’t want to put down 20%, so they have more cash on hand for repairs, remodeling, furnishings, emergencies, etc.
- PMI isn’t forever. Borrowers pay their PMI until they have accumulated enough equity in the home that the lender no longer considers them high-risk.
- The rate of your PMI depends on the size of the down payment and mortgage, the loan term and your credit score. The greater your risk factors, the higher the rate you pay.
**Disclaimer: I am not a mortgage professional, always consult with your lender regarding mortgage decisions. If you are wanting to get connected with some of my highly suggested lenders in Chicago (& elsewhere) contact me.