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