What is PMI, and why do you need it?
When you buy a house, you may be required to pay Private Mortgage Insurance (PMI) if you put down less than 20% of the purchase price. PMI protects the lender in case you default on the loan. In this blog, we will explain what PMI is, how it works, and why it may be required.
PMI is an insurance policy that you pay for to protect your lender in case you default on your mortgage. If you put down less than 20% of the purchase price of your home, your lender may require you to pay PMI. PMI is not the same as homeowners insurance, which protects you if something happens to your home, like a fire or theft.
How Does PMI Work?
PMI is usually paid as a monthly premium that is added to your mortgage payment. The cost of PMI varies depending on the size of your down payment, your credit score, and the amount of your loan. PMI can add several hundred dollars to your monthly mortgage payment, so it is important to factor this into your budget when you are considering buying a home.
PMI is typically required until you have paid off 20% of the loan principal, or until you reach a certain point in your mortgage term, depending on the terms of your loan. Once you have paid off enough of your loan, you can contact your lender to cancel your PMI. You may also be able to have your PMI automatically canceled once you reach a certain point in your mortgage term.
Why is PMI Required?
PMI is required because it protects the lender in case you default on your mortgage. If you put down less than 20% of the purchase price of your home, the lender is taking on more risk. PMI helps mitigate that risk. Without PMI, lenders would be less likely to offer mortgages to borrowers who cannot afford to put down a large down payment.
PMI can also help you get into a home faster. If you don't have enough money for a large down payment, PMI can make it possible for you to buy a home with a smaller down payment. This can be especially helpful for first-time homebuyers who may not have a lot of money saved up.
PMI can be a significant expense, but it may be a necessary one if you cannot afford to put down 20% of the purchase price of your home. Before you buy a home, it's important to factor in the cost of PMI when you are considering your monthly mortgage payment. If you have questions about PMI or how it works, talk to your lender. They can help you understand the terms of your loan and the cost of PMI.