PMI INSURANCE IS NOT A BAD THING

PMI INSURANCE IS NOT A BAD THING

PMI Insurance (private mortgage insurance) is not a bad thing, always.  Many home buyers don't really understand PMI insurance, the reason, the purpose. Often these home buyers just know they've heard it is a bad thing. 

What is PMI Insurance? PMI Insurance is actual insurance that protects a lender in the event a home owner defaults on his/her mortgage.  

Who pays for PMI insurance? Often the home owner pays for PMI insurance, however, some lenders offer lender paid PMI insurance.  

Lender Paid PMI insurance generally carries a higher interest rate compared to the borrower paid policy, but can be a good option for a starter home as opposed to a 30 year mortgage for instance.

HOW DOES PMI INSURANCE WORK: If a borrower puts down 5% and purchases a home the lender will get PMI insurance to cover 15% of that purchase price. In the event the home buyer defaults on the loan the lender goes to the PMI insurance company and files a claim for the covered amount, the home can be sold in a foreclosure and the lender is whole. 

Some PMI Insurance is permanent.  Currently FHA loans, depending upon the down payment amount can be permanent. Conventional loans, on the other hand, will cancel the PMI insurance by the time the loan is paid down to 78% loan to value.

When I say PMI insurance is not a bad thing it is because without PMI insurance the home buying market would have to save substantial down payment funds before a home could be purchased. Imagine that market, there would be way fewer opportunities to own a home.

Best advice is to consider all options when buying a home. PMI Insurance is often a good thing, particularly for the first home. Different loan programs have different guidelines, home buyers should educate themselves about the choices available.