What Is PMI and Will I Need It?

If you want to put down a lower down payment, you may need to pay PMI as part of your mortgage.

Woman unpacking after moving into new home.

PMI, or private mortgage insurance, protects the lender (not you) in case you’re not able to make your mortgage payments. If for some reason you miss a payment, the lender will still get paid.

If you’re shopping for a new home and are planning to take out a mortgage, you might be required to pay PMI.

Lenders typically require private mortgage insurance if you make a down payment of less than 20 percent of the asking price of the home. Typically you pay for PMI as a monthly premium along with your monthly mortgage payment. Or, you may be able to pay for your private mortgage insurance policy in one big lump sum at closing.

You’re generally required to pay PMI premiums on conventional loans until you’ve built enough equity in your home to equal 20 percent of your home’s value. Your mortgage loan officer can walk you through the specifics if you have questions.

Pros and Cons of PMI
If you’re not in a position to make the 20 percent down payment on your home, paying for private mortgage insurance gives you the freedom to move ahead with your homebuying goals sooner with a smaller down payment. And, at times when mortgage rates are low, you can take advantage of them right away with PMI rather than risking paying higher rates in the future after you’ve saved more toward your down payment. Having more liquid cash on hand instead of having it invested in your home can give your finances a little more flexibility to meet other financial needs as a new homeowner.

On the other hand, you’ll be paying more for your mortgage if your monthly payments include private mortgage insurance. And, if it takes years for you to reach the 20 percent equity threshold, those PMI payments can really add up.

Your mortgage lending officer can help you explore detailed pricing for different options, so you can determine what is best for your short- and long-term goals.

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