What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is a type of mortgage insurance that is required for conventional home loan borrowers who make a down payment of less than 20 percent of a home’s purchase price. This insurance – which could cost an additional hundreds of dollars a month – protects the lender in case the borrower stops making payments on the home loan.

Why is PMI needed?

PMI can help borrowers qualify for a home loan that they might not otherwise be able to get right away. For example, if you haven’t saved enough for a 20 percent down payment, PMI will allow you to still purchase a home by providing a lender insurance to cover losses if you stop payments on your home loan.

How is PMI assessed?

Private insurance companies offer PMI through a monthly premium that is typically added to your mortgage payment, although there may be an option to make a one-time up-front PMI payment at closing. Some lenders may require both.

How to avoid PMI?

There are a couple of ways to avoid paying PMI if you don’t have 20 percent saved for a down payment. One is to search for loan programs that have smaller down payments that don’t require PMI. These programs usually have a higher interest rate, which in the long term can cost more than if you paid the PMI.

Another way to is explore an FHA loan. This is a government-backed home loan insured by the Federal Housing Administration for borrowers. The best way to avoid PMI, however, is to save enough money so that you can make a 20 percent down payment on your home loan.

Contact us today

If you’d like to learn more about PMI and the various home loan programs available, contact Travis Credit Union today. We’ll go over all of your options as a home buyer so that you’ll be able to select the right loan for you.

Visit traviscu.org/real-estate for more information.

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