So long are the days of being required to put 20 percent down on a home before the keys are handed over. Nowadays, homebuyers have a plethora of different loan options to choose from, some even allowing you to move in without putting any money down. If that’s the case, you’ll likely be required to pay private mortgage insurance, better known as PMI.
How does it work? According to the Consumer Financial Protection Bureau, PMI is a type of mortgage insurance that may be required if you take out a conventional loan on a home. Most lenders require homeowners who still owe 80 percent or more of their principal loan balance to carry PMI. On average, coverage usually ranges anywhere from 0.5 to 2 percent of your home’s value, on an annual basis.
To set things straight, PMI protects your lender, not you. So, if you stop making monthly mortgage payments, PMI kicks into effect so your lender doesn’t take the brunt.
PMI is usually arranged by the lender and provided by a private insurance company. Also, important to keep in mind, whenever you’ve paid 20 percent towards your principal, you’ll usually be able to drop PMI coverage.
When paying for PMI, a few options may be on the table. First, the most common form of payment, is to make monthly payments towards a premium. Second, you may pay your entire premium at closing. Third, sometimes you’ll have a combination of both the first and second options.
According to Investopedia, homebuyers may be able to take out a smaller loan to pay 20 percent towards the down payment, where they can avoid PMI. This is commonly referred to as Piggybacking.
If you’re worried about taking out an additional loan or tacking on an extra bill every month for PMI, it may be in your best interest to consider saving for the 20 percent down payment. Along with being off the hook for PMI, you may also qualify for a lower interest rate with 20 percent or more put down.
If you do opt for less than 20 percent, just remember, PMI protects your lender, NOT you. Always stay on top of your mortgage payments.