For many homeowners, their mortgage payment contains more than just principal and interest. A little something called PMI could be representing a significant portion of that payment, and it’s important for home buyers to understand this cost.
What Is PMI?
PMI stands for private mortgage insurance, or sometimes just mortgage insurance. However, it isn’t intended to mitigate risk for the homeowner, but rather the bank.
Statistics show that when a home buyer puts less than 20% down on a home, he/she is much more likely to default. So, requiring these buyers to carry PMI helps the bank hedge their losses in the event of a default.
It’s important to note that the home buyer doesn’t shop for PMI; this is all taken care of by the lender. However, the cost of PMI should be calculated out well before closing to help the home buyer be aware of his/her final mortgage payment.
Who Needs PMI?
Who will need to carry PMI depends on factors like the credit rating of the buyer and the exact mortgage being sought out. However, it’s safe to say that most home buyers with less than a 20% down payment will be required to carry PMI.
Does PMI Ever Go Away?
Eventually, PMI can be removed from a mortgage once enough of the principle has been paid down or enough years have passed.
It’s important for home buyers to fully understand the terms of their PMI requirement. Sometimes, it will be automatically removed once 20% of the house has been paid off, while other times, refinancing may be required.