The Dreaded PMI

I recently worked with a client who had never heard of PMI. That’s not crazy – I had never heard of it either until I was buying my own home. It’s sort of skirted over in a lot of the homebuying process, even when talking to banks.

So what is this dastardly acronym? PMI stands for Private Mortgage Insurance. What that amounts to is that if you are not able to put 20% down on your purchase, the bank adds an additional level of insurance to protect their asset. This is generally .5-2.25% of your total purchase price and is VERY important to factor in when considering your monthly payments. For example:

Purchase price: $200,000 PMI at 1.5%: $3000 a year $250 a month in addition to your mortgage, insurance, and taxes.

As you can see from that example, you definitely don’t want to overlook a PMI payment when considering your monthly totals. $250 can be quite a jump. Different companies usually have different PMI rates so it’s best to check out a few and not get stuck with a high rate.

“PMI is the worst. I’m stuck forever?”

Yes and no. If you have a conventional loan (basically, a private loan through a bank or mortgage company) you will be eligible to get rid of that PMI payment once you pay off 20% of your loan (basically, once you are able to have that original 20% down the bank wanted). If you’re able to scrounge up some extra money each month and put it toward your mortgage, this will help you reach that 20% more quickly.

So why the “no?” Unfortunately if you get an FHA loan (a government-backed loan), you are stuck with that PMI forever. This is because FHA loans help with people who have slightly lower credit or less yearly income and are more of a ‘risk’ to the lender. They want that extra level of PMI protection forever. So again, make sure you know what kind of loan you have and how much your PMI might be – whether it’s just until 20% or if it’s forever.

One bonus is if you’re active or retired military, VA loans never have PMI! Always look into this if you qualify. They have some great loans and plans.

As always, feel free to contact me if you have more questions about types of loans or PMI, though your lender is your be-all, end-all for mortgage information.

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