Buying a home can be one of the most rewarding lifelong goals you can ever achieve, but with home prices surging across the country, it may seem further and further out of reach for many people. This is because the typical 20% down payment is just too much for many young and first-time homebuyers to handle. And it’s easy to see why: with living costs also rising, finding $60,000 to put down on a $300,000 home is just too much for most young home buyers and those with tighter budgets to deal with.
Today, there’s a solution for this issue—buying private mortgage insurance, or PMI, as a part of your loan. Private mortgage insurance (or PMI for short) can help you buy a home sooner, but with a few added stipulations and caveats. Here are four things you need to know about PMI before signing on to a mortgage which requires it.
PMI Protects Your Lender, Not You
First, and this is important, PMI is not intended to protect you. You might have to pay the premium, but you are not the benefactor if for some reason it needs to come into play. Instead, your lender is the one who is covered under the PMI policy. Essentially, PMI is offered by financial insurance institutions to protect your lender in the event you default on your loan. Your lender then passes this cost on to you, either up front with closing costs or over the course of several years in the form of an added cost in your mortgage payment. You are required to purchase PMI for the duration of the time in which you do not have at least 20 percent equity in your home.
Now, not all loans that fall below the 80/20 ratio will require PMI—some lenders will forego making you pay for PMI in exchange for implementing a higher interest rate. Some publically-funded loans like FHA loans also don’t require PMI and can have down payment requirements as low as three percent. However, in any instance, it’s a strong bet that the cost of your mortgage insurance is going to be passed to you somehow.
PMI Is Not Life Insurance
Mortgage life insurance is a special type of coverage which pays off the balance of your mortgage in the event you pass away. In essence, this is a way you can protect your heirs from being straddled with the remainder of your mortgage should a tragedy occur. PMI is entirely different from this—as we stated earlier, PMI is not designed to protect you, just your lender in the event you default on your loan and the lender stands to lose a substantial amount of money.
PMI Is Not Permanent
You will not have to pay PMI for the entire duration of a 30 year mortgage. In fact, odds are you’re probably won’t even have to pay it for all that long. Once your loan reaches a debt/equity ratio of less than 80 percent (in other words, you have more than 20 percent equity on your home) you can send your lender a request to cancel your PMI, which should shave a substantial amount off your monthly mortgage payment.
It doesn’t really matter how you get to this point, either. Those who want to keep their extra expenditures as low as possible on their mortgage may want to consider making higher-than-necessary payments on their home for the next several years in order to build up equity faster. Once your equity level reaches 20 percent, you can cancel your PMI. Some buyers do this in as little as a couple years to even just a few months, depending on how much they’re capable of putting down initially.
PMI Is Not a Bad Thing
For those thinking you want to avoid PMI at all costs, it’s worth noting that PMI isn’t a bad thing. In fact, PMI has allowed for many home buyers who have the budget to be able to afford a home but simply lack the resources for a down payment to be able to buy the home of their dreams after all. As long as you’re aware of what you’re getting into and how much house you can truly afford (with your PMI included), then PMI may be the key to buying a home you may never have thought you could afford.
If you need assistance with a PMI-related matter, trust the Waterbury attorneys from Fitzpatrick Santos Sousa Perugini, P.C. to provide you with reputable counsel. Call us at (203) 583-8299 to request a consultation.