What Is The Purpose Of PMI?

Written by Jason Nelson on January 23, 2017

PMI

If you want to buy a house and are unable to put down 20% what do you do? As discussed in a previous blog post there are ways to become a homeowner without putting down 20%. However, this puts more risk on your lender. This is why they require you to purchase PMI. So what is the purpose of PMI?

PMI is an acronym for private mortgage insurance. If your down payment is less than 20%, lenders will typically require you to get private mortgage insurance. This is insurance that protects your lender if you default on your loan. In simple terms, the purpose of PMI is all about protecting your lender from risk. Since you are putting down less than 20% the lender has to put up more than the typical 80%, which is risky. They want to ensure that they will be paid back. Typically this will cost the buyer from 0.15% to 2.5% of the loan amount. The rate will vary based on your personal situation.

PMI can be canceled.

An article by Bankrate says PMI can be cancelled once your loan balance reaches 80% of the home’s original value. At this point you are able to ask your lender to discontinue the mortgage insurance premiums. Lenders are required to cancel PMI when the ratio drops to 78%.

PMI can be deductible in some circumstances.

According to an article by Glenn Curtis PMI can be deducted for some who fall within a certain income bracket. Typically if you itemize your deductions and make less than $110,00 a year, PMI will most likely be counted as a deductible. However, it is advised that you ask your tax advisor about your personal situation to determine if PMI will be a deductible for you.

*You Don’t Need to Purchase PMI if You Qualify for a VA Loan.

Veterans can benefit from VA loans by obtaining a loan without a down payment, they don’t have to have a perfect credit score, and there is no need to purchase PMI.

All in all, the purpose of PMI is a tool that is used to protect your lender. Therefore, it is often advised to save that 20% for a down payment. This way there is no need for you to bear the extra expense of PMI. Saving that 20% is typically the most daunting task for first time homebuyers. Luckily there are ways you can go about buying a home that will help you save in the long run. However, if you are unable to wait to save for that dream home and you believe that paying for PMI is worth it, then by all means go for it.

North Florida Mortgage wants to help you obtain your dream home! To see if you qualify for one of our mortgage programs or to find out other details about getting a home loan, please call one of our mortgage professionals today. We can help you find the financing that fits your needs.

Posted Under: Mortgages

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