What is Private Mortgage Insurance?

Purchasing a home is a dream for most. For those who can’t afford the 20% down payment, private mortgage insurance (PMI) can make that dream a reality. However, PMI can have some disadvantages, too. Here’s what you need to know about PMI.

PMI Explained

If you default on your mortgage, PMI protects your financial institution from losing money.

For instance, if you purchase a $100,000 home and put 10% down ($10,000), then the lender is responsible for 90% ($90,000). So, $90,000 is then multiplied by 0.005% for an annual PMI of $450, or $27.50 per month.

Navigating Private Mortgage Insurance

In today’s market, avoiding PMI is difficult. However, even if you can’t afford to put 20% down when purchasing a home, there are things you can do to try and avoid PMI:

  • Talk with your lender. They may have a less-than-20% rule in place if you have a good credit score.
  • Obtain an 80-10-10 loan. On this plan, 90% of the loan is financed with a first mortgage equal to 80% of the sale price. Then, a second mortgage with a higher interest is applied for the remainder of the sale price. The monthly payments for these two mortgages are usually lower than paying one mortgage with PMI.
  • Tell your lender that paying PMI is a deal-breaker for you and that you will take your business elsewhere if it isn’t waived.

Establish a Budget

When you’re looking for a home to buy always stick to a budget. Only look at properties you can afford without putting yourself in a financial crunch. After all, remember that even after you purchase the property itself, you will still need money to decorate and furnish your home, pay for an inspection, set up utilities and more. All of these expenses can add up quickly, so it’s best not to stretch yourself too thin.

For more NH homeowners insurance solutions, contact us today.

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