“Whose initials are PMI and why do I have to deal with them for a house?”

Frank W. from Boston asks: “Whose initials are PMI and why do I have to deal with them for a house?”

What is PMI? It stands for Private Mortgage Insurance. Simply put, PMI is an insurance policy on your loan. You pay the premium, typically in monthly installments, which are added to your mortgage. With this, the lender is covered if you default on your mortgage.

Why does PMI happen? We have always heard that you need 20% down to get a loan. In a perfect world, 20% down is the best way to go. BUT, it’s not always feasible. Say you live in an area with a median home sale price of $400k, 20% of that price is $80k! How do you save that much when you are paying $2k every month in rent (for tips on saving money to buy a home go here: "Add It Up!").

A more reasonable goal is to save 3.5-5% (somewhere between $14,000 an $20,000). PMI is applied to 20% of the value of the home.

According to bankrate.com, “Private mortgage insurance fees vary, depending on the size of the down payment and your credit score, from around 0.3 percent to about 1.5 percent of the original loan amount per year. Some years, PMI premiums are tax-deductible and some years they are not. It depends upon the whim of Congress.”

(to read full article from bankrate.com, click here: "The Basics of PMI")

PMI is charged on the outstanding loan balance, so if you buy a $400k house and put $20k down, you are paying PMI on $380k. Once your loan hits 80% ($320K), you are able to call and cancel your PMI. When your loan has reached 78% of the value ($412K), the lender must cancel PMI.

Call today for assistance finding a lender that can help!