Do all home buyers purchase PMI (private mortgage insurance)?

What is PMI? Do all buyers need it? 
PMI - Hundred dollar bills, shape of house and words PMI and your mortgage

PMI, or Private Mortgage Insurance, is used when buyers have less than 20% down and are obtaining just one mortgage.

Who needs PMI? Who doesn’t?

Not everyone needs Private Mortgage Insurance.

If you have 20% to put down (your down payment), and it’s a regular or conventional loan, you do not need to pay for this insurance product.

Put another way, if you are obtaining one mortgage and it has a higher than 80% loan to value ratio, such as an 85% or 90% mortgage, you will buy the mortgage insurance.

A 10% or 15% down mortgage with just one loan will require PMI.

A way to avoid paying for this fee is to get an 80% first loan and a smaller second loan. The first loan won’t require the insurance. The second loan will have a higher interest rate, though. The advantage to this approach is that when you pay off the second mortgage, you are done with the higher cost.

On the other hand, if you have Private Mortgage Insurance and you want to be freed from it when your home value rises,  you’ll need to pay for an appraisal and hope that it comes out favorably. It can be a hassle to break loose of it.

If you’re purchasing with FHA backed financing, there’s mortgage insurance built into the product. (It’s government backed, so it’s just MI rather than PMI.)

Who is protected with PMI?

This type of insurance does not protect the consumer. Instead, it protects lenders in case of a default by the borrower.

 

Related reading:

What is mortgage insurance and how does it work? (From the Consumer Financial Protection Bureau)

Seller concession (this site)

 

 

 

What is PMI? Who needs PMI?

Many Silicon Valley home buyers rely on PMI, or Private Mortgage Insurance, to purchase a house or condo. But what is it and who needs it?

Private mortgage insurance is usually required with loans in which the buyer has less than a 20% down payment.

PMI does not protect you, the residential real estate consumer. It protects your lender in case you default!

FHA loans don’t have PMI but instead there is a “government guarantee” and for that you pay a premium – so not called PMI but it works similarly. The cost may range from 1 – 2.5%.

FHA or Conventional with PMI?

If you have less than 5% down, FHA will be your only option. But between 5 and 20% down, you may choose.

If you are trying to decide between FHA and conventional loan products with PMI, talk to you mortgage broker or banker to see which one really costs more in the long run, factoring in the total package of interest rates, premium rate etc. (FHA loans may come at a lower interest rate but with other added costs – so don’t just compare interest rates.)  The result may depend on the loan to value of the property, your credit score, and other factors. There don’t seem to be any “easy answers” as to which one is necessarily better.  This decision will require a little research!

If you expect to be bidding in multiple offers, this is another consideration too – it can be very hard for home buyers in the South Bay to win out in multiples if they are using FHA financing (as opposed to conventional).

Finally, like HOA dues, PMI is not something you can usually deduct from your income taxes (unless the PMI cost was simply rolled into your interest rate).  Please talk to your lender and tax professional for more information on PMI and the tax ramifications.

Related reading:

Is your lender pushing you into an FHA loan?

The challenge of being an FHA home buyer in a seller’s market

First Time Home Buyer with FHA Financing? Make Sure That Your Offer is Well Drafted!