Ready to buy a new home but don’t have 20% to put as a down payment? This is where PMI, or Private Mortgage Insurance, comes into play!
What is PMI?
When a buyer cannot produce a 20% down payment on a house, they are required to pay their lender private mortgage insurance. The lender requires the buyer to have private mortgage insurance so that if you can no longer make payments on your home, the lender will still get paid (through the private insurance policy). PMI basically safeguards the lender in the event of borrower default.
When do I pay PMI?
This should be worked out with your lender, but you would typically pay your mortgage insurance monthly, along with your mortgage.
When will I stop paying PMI?
Once you’ve built enough equity in your home to equal 20% of your home’s value, you typically no longer have to pay PMI. Make sure to talk with your lender about how and who will be tracking your payments for as many months or years as it takes to equal a 20% value.
Are there ways to avoid paying PMI?
Besides putting down a 20% down payment, you could technically do something called “piggybacking.” You would take out a separate loan for your 20% down payment, and then another loan for the rest of your mortgage. However, typically the interest you pay on your 20% down payment loan can be quite high, so it might be beneficial to pay PMI rather than this “piggybacking” approach. Your lender or a financial advisor will be able to determine all of your options for you.
Feel free to reach out to us with any questions about PMI!