Mortgage insurance (PMI) is often seen as a bad word in the mortgage industry because it is, after all, a cost to the consumer. No one wants to pay additional costs, but to really understand mortgage insurance, it becomes clear that mortgage insurance, or PMI, is a positive – for borrowers, for lenders, and in the big picture, for the housing industry.
Before we go too deep, it’s important to answer the question “What is PMI?”. Mortgage insurance (PMI) is an insurance policy that insures a lender against a default – that is to say, if you get a mortgage and fail to repay it, and the bank has to foreclose on the home, the bank receives an insurance payout to mitigate some of those losses. So “why do I need mortgage insurance” is a question many borrowers ask. After all, a borrower pays for it, but receives none of the benefit, right?
Well, in the past, lenders required 20% down to purchase a home. This was because in the event of foreclosure, the losses would stack up, and lending more than 80% of a home value was too much risk to handle for lenders. Enter PMI – PMI is actually the reason people can buy homes with less than 20% down, and just about any loan program that allows for a lower down payment has mortgage insurance associated with it in some form. VA loans? They include an up front mortgage insurance premium (UFMIP – we know, there weren’t already enough acronyms in the mortgage business!). FHA loans include this fee as well, along with monthly mortgage insurance. Conventional loans have PMI in various forms, and even loans that don’t show the PMI as a portion of the monthly payment or loan amount absorb the cost into a higher interest rate.
Mortgage insurance is responsible for nearly all of the low- to no-down payment options that exist. So while it’s a cost to consumers, the benefits of PMI far outweigh the negatives. PMI companies also reward borrowers in many cases for things like great credit – especially on conventional loans, PMI rates can be very affordable.
So you may not WANT mortgage insurance, but you may NEED it. And in many cases, it may make more sense to take a loan with PMI than without it. Let’s take the example of the 15% down conventional loan. For a borrower with 15% down, PMI is extremely affordable for those with great credit. If 20% down would be stretch and destroy savings, that 15% down option with PMI may be better and leave a borrower in a more comfortable financial position than if they stretched to put 20% down (the difference between 15 and 20% down on a $500,000 purchase is $25,000!).
How can you decide if a loan with PMI is right for you? We recommend talking with you loan officer about different loan options, including various down payment and program options. If you have less than 20% down, you’ll likely see mortgage insurance in some form, so it’s a good idea to understand how it works. If you’re stretching to save 20% down, you may want to talk to your MasonMac loan officer to see if another program option could be a better choice. A good loan officer will guide you through the options, provide the positives and negatives with each program option, and help you make the right choice for you and your family.
Questions about PMI? Down payment assistance? Low- or no- down payment options? Give your MasonMac loan officer a call, or reach out for help at firstname.lastname@example.org or by asking an expert here.