PMI is a mortgage industry acronym that stands for Private Mortgage Insurance. You may have heard it called Mortgage Insurance, or just MI. It’s all the same thing. This is an insurance policy the mortgage company takes out to protect themselves against late payments on lower down payment loans. If you default on a loan, they make a claim with the PMI company and that PMI company pays the mortgage company to help recoup their losses.
The bad news:
PMI is something you pay for. That’s right. Even though this insurance does not benefit you in any way, shape, or form, the mortgage company makes you pay for it. So, if you have a lower down payment, expect to pay PMI.
How do you pay for it?
The most common way of paying PMI is through the mortgage payment. If you have a lower down payment loan, there is a good chance that your payment includes PMI. However, there are other creative ways of getting the PMI paid for. Sometimes the lender will allow you to pay for it up front. So, rather than paying for it monthly as part of your mortgage payment, you can pay one lump sum at the time of mortgage closing.
WARNING—this can be expensive. In most cases, it is an added cost of several thousand dollars.
Another alternative option for PMI payment is “lender paid” PMI. This is where the lender pays the PMI for you but increases your interest rate on the mortgage loan in return. This increased rate gives them more profit. That extra profit is what allows them to pay the PMI for you.
WARNING—this too can be expensive. In most cases, it can increase your interest rate by 0.500% or more.
How can you avoid it?
The easiest way to avoid PMI is obtaining a conventional loan with 20% down. A down payment of that size prevents the mortgage lender from acquiring an insurance policy on your loan.
What if you don’t have 20% down?
No worries! PMI is not evil. In fact, a large percentage of people with mortgage loans pay PMI. In my professional opinion, PMI should not be a deterrent from obtaining a mortgage. However, it’s always a good idea to seek advice from a wise mortgage advisor on how PMI should be structured.
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