“What is Private Mortgage Insurance (PMI)?”

For many people, putting a 20% down payment on a new house is not an easy task.  With house prices growing at incredible speed since the 2008 recession, many major cities and suburbs are becoming un-affordable for the “average” American worker.  However, if you are unable to put this 20% most lenders will charge you Private Mortgage Insurance (PMI) which can cost you big $$’s over the life of your loan. How important or valuable is it to eliminate PMI?  After reading a recent article on the subject, here are some interesting items to consider:

• Why do banks require 20% down in the first place?
  • PMI is insurance for the lender (usually a bank) and not the borrower (you). PMI is there to protect the lender if the borrower stops making mortgage payments and the proceeds from a foreclosure and sale of property are insufficient to cover the outstanding loan.  The important thing to know is that PMI is protection for the banks.
• How PMI is determined?
  • PMI usually amounts to between 0.3% and 1.2% of the mortgage amount on an annual basis. So on a $300,000 mortgage and assuming 0.7% of PMI, a borrower can expect to pay an extra $2,100 per year or about $175 more per month.  The specific amount and percentage that a bank uses depends on many factors, but one of the main ones is whether you decide to pay PMI on a monthly basis or as a lump-sum premium at closing.
• Ongoing PMI Payments vs. Up-Front PMI Payment
  • While the majority of borrowers add PMI charges to their monthly mortgage payment, there is an option to pay the PMI charge up-front at closing. This upfront amount is usually 2.5 to 3.5 times the annual PMI amount so if you are considering this option then I would encourage you to consider the following:
    • If I can pay 2.5 to 3.5 times the annual PMI amount am I better off saving a little more down payment and avoiding PMI altogether?
    • If I move out of this house in 1 to 2 years’ time then I cannot get the up-front payment back which may not be a smart move.

There are many more factors that go into Private Mortgage Insurance, but it’s important to equip yourself with this knowledge before getting emotionally involved with a house purchase decision!

April 26th, 2019