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Is Private Mortgage Insurance Good or Bad?

If you don’t have the money for a down payment on a home, you might have heard of private mortgage insurance, or PMI. This tool can help you buy a home faster, but it’s not without its costs. Learn more about PMI and decide if it’s worth the risks.

What is Private Mortgage Insurance?

When you get ready to buy a home, many advisors suggest that you pay 20 percent of the overall cost as a down payment. As housing prices rise, this can be a substantial barrier to home ownership, especially if you’re a first-time buyer without money from the sale of a previous property. 

With the right credit history, you can still buy a home without as much cash, but it makes the loan riskier for your lending institution. That’s where private mortgage insurance assists.

As the name implies, PMI is an insurance policy that covers a conventional loan, as explained by the Consumer Financial Protections Bureau. Lending institutions usually attach PMI to loans with less than a 20-percent down payment, and the premium typically costs anywhere from 0.25-2.0 percent of your loan balance per year, according to Amy Fontinelle of Investopedia.

This is on top of what you owe the lender for balance and interest. While a lot of the insurance you buy protects you, PMI’s main goal is to protect your lending institution in case you default on the loan.

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How Do You Pay for Private Mortgage Insurance?

There are several ways to pay for PMI, and your lending institution will discuss your options with you. The team at Zillow reports that there are two common methods: lump sum and monthly. 

Most often, you will pay mortgage insurance premiums monthly with the mortgage payment for your current loan, and your lender is responsible for separating the premium payment from the pile and sending it to its insurer. Some lenders offer a lump sum option that lets you pay for your PMI upfront. This is either with cash when you close on the home or added to your financing package total.

Related: How much should you actually spend on housing? 

How Do I Get Rid of PMI?

While PMI is a great way to jump into home ownership, it is an additional bill each month. Once you have paid enough on your home to own 20 percent equity, Elizabeth Weintraub of The Balance reports that you might be able to stop paying monthly for PMI. 

Before you change the payment headed to the lending institution, you need to call them and ask how to cancel the PMI policy. It might take a while to get PMI taken off your mortgage, as the lender will want an appraisal to confirm that you have more than 20 percent equity in your property, which you will have to pay for. In the end, it’s extra money in your pocket to do the legwork to cut out unneeded insurance.

If you are ready to leap into home ownership but your down payment is a little out of reach, talk to your lending institution about your mortgage options and private mortgage insurance.

Wealth Management Advice

Buying a home is a big investment. To get there, you need a solid financial plan. 

Check out our free financial tools to compare mortgage options, see how much you need to save to reach a goal, get on track for retirement and more.

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