PMI: Should You Avoid It at All Costs?
PMI protects the lender if a borrower defaults, and it makes monthly payments higher the entire time a borrower has to carry it.
Doesn’t sound ideal, right?
PMI is an additional cost — there’s no way around that fact. However, spending that extra cash every month can sometimes feel like a small price to pay if that’s what will allow you to finally become a homeowner.
Make no mistake: Loan programs that allow for lower down payments are the real MVPs in this scenario. They may allow you to get out of the rent race sooner because you don’t have to save for years and years to get that 20% down payment. Instead of throwing your cash into the renting black hole, you have the opportunity to begin investing in your future.
In a rising home-price environment, you benefit two-fold from homeownership: first, you gain equity by making your monthly payments. Then, you gain equity every time your home rises in value. PMI just happens to be part of that equation when your down payment is less than 20% with a conventional loan.
All in all, about a quarter of all conventional loans carry PMI, according to the Urban Institute. If you include all other types of mortgage insurance (like MIP on FHA and VA loans), then nearly half of all loans originated in 2016 carried it.
Though that means these homeowners make a higher payment as a result, there’s a major silver lining: PMI isn’t forever. Once you reach 80% loan-to-value (LTV), you can contact your mortgage lender to cancel your PMI. It should be a quick and painless process. If you reach 78% LTV, your lender is legally required to cancel it on your behalf (as long as you’re current on all your payments).
It has even been argued that there exists a positive correlation between PMI and rising home values.
To PMI or Not to PMI?
Want to know how PMI could impact your home buying options? Get in touch with an Embrace Home Loans mortgage specialist today. We’re here to guide the way.
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