What is Private Mortgage Insurance & Will I Need It?

You’ve probably heard that homebuyers should have a down payment that is equal to 20% of the home’s purchase price. But the reality is a lot of potential buyers simply don’t have tens of thousands of dollars saved.

That’s when private mortgage insurance, or PMI, comes in.

PMI 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 but will have a smaller down payment your lender will likely require you to pay PMI.

PMI is different from Points which you may have heard about while researching the homebuying process. Points refer to a payment you make at closing that lowers your interest rate. Typically, you pay for PMI as a premium that is rolled into your monthly mortgage payment – though you may be able to pay for it 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% of the home’s value.

Your mortgage loan officer can walk you through the specifics if you have questions.

What Are the Pros and Cons of PMI?

Deciding whether paying PMI or committing to saving up a 20% down payment depends on your personal circumstances and goals. This pros and cons chart can be a good starting point to help you figure out the right path for your situation.

Pros of PMI

• Can buy a home with a lower down payment
• May be able to buy a home sooner since you aren’t working on saving for a large down payment
• More freedom to take advantage of lower rates when they’re available vs. risking a higher rate environment in the future
• May leave you with more cash on hand to make purchases or upgrades to your new home

Cons of PMI

• Your monthly mortgage payment will be higher than if you put down 20%
• If it takes you a long time to reach the 20% threshold, you’ll be spending a lot on PMI over time

Finally, take the time to talk with your lender about different options and their costs in detail. That will give you a clearer understanding of the different approaches and can help you decide what the best choice is for your short and long-term goals.

Ready to buy? Get in touch with our local mortgage lending experts or get preapproved. 

Still researching? Explore our Mortgage Learning Center.