PMI -- Is It Good, or Evil??


PMI -- Is It Good, or Evil??
By Scott Rogers • February 20, 2008
I am frequently asked whether PMI (private mortgage insurance) is a good thing, or something to avoid. To start with --- private mortgage insurance is an insurance policy that protects the lender in the event that a borrower stops making payments, the lender has to foreclose, and they can't recoup all of their costs. Despite the fact that the lender is the beneficiary of the insurance policy . . . you guessed it, the borrower gets to pay for the policy! PMI is required (by most lenders) for any mortgage where the loan-to-value ratio is greater than 80%. In other words --- if you have less than a 20% down payment, you will likely have to pay PMI. PMI is typically paid on a monthly basis --- with every mortgage payment. However, with most lenders, you can avoid paying PMI by paying a slightly higher interest rate. Don't be fooled --- the intent and result are essentially the same. When a borrower has to finance more than 80% of the purchase price, a lender is a bit more worried about their future ability and likelihood to repay than if they are financing 80% or less. The lender mitigates this risk by taking out an insurance policy, and having the borrower pay for it. The policy can either be paid for (by the borrower) each month, or up front. Thus the option of either paying every month, or over the life of the loan (in the form of a slightly higher interest rate). I suggest that most of my clients pay the PMI each month. Typically, the monthly payments are about the same regardless of whether you pay PMI each month (with a lower rate), or do not pay PMI (and have a higher rate). So . . . If you are paying PMI, you can eventually have the PMI portion of your loan payment removed, and lower your monthly housing cost --- as soon as your mortgage balance is 78-80% of the appraised value of your home. If you are not paying PMI, you will always have the higher monthly payment, despite the fact that you will (at some point) owe less than 80% of the appraised value of the property. And...don't forget that the PMI cost is tax deductible. One final note --- if you have monthly PMI costs, at some point you will want to have that part of your payment removed. Before you hire an appraiser to appraise the property and prove that your loan balance is less than 80% of the appraised value, check with your bank on their process. Many banks have a list of appraisers that are acceptable for this process, and some banks insist that they generate the appraisal request. Receive Updates by Email Recent Articles: There Are Plenty Of Types Of Houses That Exist That Just Are Not Available To Purchase Home Sales By Price Range In The City Of Harrisonburg Are You Compromising On Aspects Of Your Next Home That You Can Or Cannot Change Later? How Much Slower Are The Winter Months In Our Local Housing Market? Rockingham County and New Home Sales Drive Surge in Area Housing Market Find The Balance Between Optimistic And Realistic Home Pricing Room Size Is Difficult To Understand Solely From Real Estate Photos How Much Would You Value Not Having To Prepare Your Home For Showings? One Out Of Four Homes Is Taking Longer Than A Month To Sell Consider The Cost Of Your Planned Renovations When Planning Your Offer
Have any questions? Contact Scott Rogers at 540-578-0102 or scott@funkhousergroup.com
Based on information from the Harrisonburg-Rockingham Association of REALTORS® or its MLS, for the period Jan 1, 2000 through Nov 22, 2024 (unless otherwise noted).
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