There are a number of things you should legitimately be afraid of in this life — great white sharks, cigarette smoke, Scott Pruitt’s EPA — but private mortgage insurance (also known as “PMI”) is not one of them. We’re going to cover the basics here and I’m going to work to dispel a lot of the misconceptions about PMI. Most importantly, we’re going to discuss why PMI on your next mortgage might be an entirely viable solution when you’re seeking to purchase a home with less than a 20% down payment.
What is PMI?
Private mortgage insurance, like all insurance, is a financial tool for mitigating risk. As the borrower you will pay a premium, usually monthly and as part of your mortgage payment, to an insurance company. Yes, it will look like you’re just paying the premium as part of your regular payment, but the specific amount of insurance will go towards an insurance policy that covers the lender’s additional risk for making a loan with a higher loan-to-value (LTV). Should you default on the loan, the insurer will pay a claim on the policy to the lender. The lender, in turn, becomes more willing to accept the additional risk of the higher-LTV loan and that enables you, the buyer, to have options to purchase a home with a smaller down payment.
…But I was told to avoid PMI…
Let’s not sugarcoat. The word on the street is that PMI is to be avoided at all costs. I get it. That attitude has been a long time in the making but I believe that you have to consider that sentiment in the context of the alternatives. Let’s assume we have a homebuyer who does not yet have a full 20% down payment saved. This person has the following options, side by side with their most glaring risks:
- Strategy: Wait to save 20%. Risk: Missed opportunities. Rising home prices, rents and interest rates.
- Strategy: Use a piggyback mortgage instead of PMI. Risk: Rising HELOC rates.
- Strategy: Purchase a home worth less. Risk: May not be a practical solution in your geographic area.
So, as you can see, in 2018 and in a rising rate environment coupled with a general shortage of housing inventory, PMI is emerging as an option worthy of careful consideration. And as a loan originator, I can tell you that with greater frequency, and especially where the borrower has a high-FICO score, PMI is winning these comparisons. Let’s not forget, with conventional PMI (unlike the FHA counterpart, MIP) there is the future ability to drop the insurance and even where we are not initially seeing clear advantages in relation to alternatives, there’s a very real possibility that ultimately and once the PMI is dropped, we would win at that time. So again, what are your financial goals and what’s the best road to reach them?
In summary, there is no “right or wrong” with the PMI choice. Instead, it’s another viable alternative and possibly a very good one for YOU. So consult an expert lender. Do the math and research on your terms. And most importantly, avoid the fake news — though you can add that to the list of things to be afraid of here in 2018. But PMI? Oh my, give it some thought.
We’re not in Kansas anymore,
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