Facts About Private Mortgage Insurance, PMI

How PMI can help you buy a home

Thank goodness there are plenty of loan choices for home buyers who do not have a large down payment.

FHA Home Loans
Securing an FHA loan is one way to move in without a large downpayment, but loan caps are in place and they vary depending on where you live.

VA Loans
Another option is a VA loan, where no downpayment is needed at all, but you must be a veteran of the US armed forces to qualify.

Other Programs
Other loan programs may also be available to you. Ask your lender which ones you qualify for.

Private Mortgage Insurance
One home buying aid that nearly everyone can use is Private Mortgage Insurance, or PMI. This special insurance protects the lender if you default on your home loan. It makes it possible for you to purchase a home with as little as 3-5 % down.

Here's How PMI Works

1. You have a 5% downpayment.

2. The lender wants to finance 80% or less of the home's value, since studies show that buyers who put less down are more likely to default.

3. The lender secures a private mortgage insurance policy for you and closes on the loan. You pay for the PMI policy at closing or (most often) you pay a fee with each monthly loan payment.

4. If you default, the lender receives the 15% you did not pay at closing.

PMI payments can be significant, so if you can avoid paying private mortgage insurance, that's great.

• You might be able to get a second loan for the downpayment, but the extra payment will affect your debt to income ratio, which in turn will affect your home buying power. The monthly payment might be more than the PMI would have been.

• Use a down payment gifting program, where the seller indirectly gives funds to help buyers make down payments.

Do PMI payments ever go away? Yes, but steps to remove it differ depending on when you bought your home. Page 2 explains.

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