What is PMI?
PMI, or Primary Mortgage Insurance, is one of the ugly little parts about buying real estate that most people learn about only after they've applied for a loan. Not everyone pays PMI. When you put down a substantial down payment, 20% or more, you do not need to pay PMI. PMI only applies when a home purchaser needs to finance more than 80% of the home. If you have to finance 90% of the home you need to purchase PMI.
PMI's purpose is to insure the lender against default. Since any loan where you you are borrowing more than 80% is considered risky, PMI is the standard way for the lender to protect against that extra risk.
How is PMI Usually paid?
Normally, most PMI programs are paid monthly. It's not cheap, and those fees add up. PMI is typically $100 or more month - $1200 a year or more, and those fees are every year until the bank determines that your equity in the property is back at the 80% threshold. PMI costs more, the more that you borrow - so the PMI on $200K is less than the PMI on $300K.
Now all that is certainly a bummer. But it's better, generally, than not buying a home, or waiting while you save up the whole 20%. In Massachusetts, saving up that 20% can take a long time. So PMI has a function, both protecting the lender and allowing banks to offer products where buyers do not need to put down 20% in order to purchase a home. If there were just a way to get rid of those monthly fees....
Is There Another Way to Pay PMI?
Either Way, PMI is Expensive.
But with Planning, You Can
Make it Cost Effective
Most times, there is another way to pay PMI. You can Pre-pay PMI in many cases. Now I'll tell you straight out - it's a lot - generally about 3 years of PMI payments. But, as we'll see, using this strategy it can cost you far less than it might normally. You can have the seller, as part of the transaction, pre pay for the PMI policy. Let's say the policy paid in full up front is $6,000. The seller pays the $6000 of PMI as part of the closing, so you can now roll that fee into your mortgage, at roughly $36/month in interest - far less than the $150 you would normally be paying. But that's not all: Since it is a one time fee, even if your home is not at the 80% threshold after 3 years, there's no additional payment, saving you thousands every year after that point.
Do Good Things Today! Matt Heisler