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!