Jo Panuwat D / Adobestock
When it comes to getting a home loan, three of the most dreaded letters are PMI. Those three seemingly harmless letters stand for private mortgage insurance, and borrowers have been conditioned to be wary of it.
PMI is a lender’s way of reducing its risk on mortgages that are secured with less than a 20% down payment. The cost is an annual premium that’s typically 0.5% to 1% of the entire loan amount on an annual basis. PMI has become something homebuyers mostly try to avoid because they’ve been told that having it is like throwing money away each month. Consider these points.
PMI Gives More People the Opportunity to Be Homeowners
Putting down a large down payment does save money on interest over time, but most buyers will not be able to put down 20% on a home, especially since home prices keep rising. PMI gives buyers who don’t have a large chunk of cash savings a way to get a mortgage and start gaining equity in their home.
PMI Can Be Canceled When Your Home Equity Is Over 20%
PMI can be canceled when the borrower has 80% equity in the home, the way they would have if 20% had been put down. However, PMI is not automatically canceled, and the buyer should be aware that they’ll need to write their lender a letter requesting cancellation.
Can You Afford PMI?
Lenders typically require that a borrower’s monthly debts not exceed 33% of monthly income. If the added cost of PMI pushes you over your monthly budget, you’ll need to shop for a less expensive home or postpone homebuying until your financial situation improves.
Affordability is a fair objection to PMI, since it adds a monthly expense to a homebuyer’s budget. But as long as the borrower can afford it—and remembers to cancel it when they get to 80% equity—then PMI is a good tool to help more buyers become homeowners.
