PMI or private mortgage insurance is basically an insurance policy on your mortgage a lender requires when the buyer does not have the typical 20% down payment. Even though the buyer pays the premiums, PMI protects the lender in cast the buyer cannot make payments and goes into default. It’s pretty much the only way a lender will agree to a conventional loan with less than 20% down.
Why the need to for PMI? It’s unfortunate but buyers with smaller down payments are considered to be more likely to default on their loan. The buyer qualifies for a loan and a lender is willing to give then a loan, they just want reassurance they will get their money back – with interest.
How much your PMI will be depends on certain factors such as your FICO score, the balance of the mortgage after your down payment and the amount you’d like to borrow – some buyers roll part of their down payment into the mortgage so that amount will be different than the price of the house. In some cases such as if a family makes less than $110,000 a year, PMI costs can be deductible.
For most conventional loans PMI is issued through private companies, but if you are applying for an FHA, your PMI is through the government. It is a good idea to go over all loan options with your lender to see which best fits your needs and make sure you factor in PMI if necessary. Such as whether your lender will let you pay your PMI costs upfront so it is not part of your mortgage, if it can be paid quarterly or if it is best to roll it into your mortgage.
Pretty much the only way to avoid mortgage insurance is to purchase a home you can afford. Meaning make sure your down payment is 20% or more of the price of the home. Either way you decide make sure you know all of your options before agreeing to any type of mortgage.
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