Private mortgage insurance, or PMI, seems like just one more annoying addition to your mortgage. But it comes with some surprising benefits to the home buyer. Find out what PMI’s benefits are in this article.

You’re shopping around for a home loan and you get offered one with a very low down payment. Great! You could use that extra money to upgrade your furniture and maybe get a nice set of gourmet cookware. But then you hear the words “private mortgage insurance” and see it’s an extra cost you’ll have to pay, either rolled into your monthly payment or upfront in a lump sum.

This may feel like a surprise extra fee, but PMI actually serves a good purpose for home buyers and lenders alike.

Read below to find out why.

What Is Private Mortgage Insurance?

Private mortgage insurance is often required on conventional loans when the down payment is less than 20% of the purchase price. If you need it, PMI is usually provided by a third-party insurer and treated as part of your loan package. Note that PMI is not the same as the insurance you need for an FHA loan; for an in-depth overview of PMI in all its forms, see this Investopedia guide.

PMI protects the lender, not the borrower. Because there’s less of a down payment on this type of loan, the lender’s risk is higher; to offset some of that risk, they require a specific type of insurance – PMI. If you stop making loan payments, PMI won’t save you from foreclosure. (You’d need mortgage protection insurance for that.) So why is PMI good for home buyers?

5 Benefits for Home Buyers from PMI

Even though it’s an additional cost, PMI offers home buyers the following perks:

1.  It can help you buy a home sooner because it reduces the down payment. This means you don’t have to save as much – or as long – and can move towards becoming a homeowner faster. And in some cases, PMI can help you secure financing.
2. PMI can open up more payment and housing options. By allowing different loan terms – e.g. combinations of down payment and monthly payment amounts – it can give you a wider choice of homes and neighborhoods.
3. You can take advantage of low mortgage rates. Because you don’t have to save for a big downpayment, you can act quickly to secure favorable mortgage rates.
4. PMI isn’t forever. Once your equity in your home reaches a certain threshold, PMI is no longer required. This increase in equity isn’t limited to just the money you pay into your mortgage; it can also be tied to your home’s value. Thus, PMI puts you in a position to gain from home appreciation (when your home gains in value since the time you bought it). However, your payments must be up to date and you must have a good payment history to end your PMI agreement.
5. Your lender will take care of the details, like finding the insurance provider and determining the terms of the plan. All this information will be shared with you before the loan is completed.  Even though PMI is an additional cost, at least you don’t have to spend your own time and effort dealing with it!

Need Help Securing a Mortgage with PMI?

Although PMI has its benefits, let’s reiterate that not every mortgage requires private mortgage insurance. PMI’s key benefit to home buyers is that it can open up new possibilities in homeownership. If you’re trying to figure out how to become a home buyer, let Mortgage 1 help! Our experts are always glad to answer your questions.

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