Buying a home is likely to be one of the biggest — and more expensive — decisions of your life. It’s easy to get overwhelmed or stressed. But with careful research you’ll be armed with all the information you need to understand the various options available to you, and help you make the best choices based on your unique situation. One thing that might come up as you’re evaluating the different types of home loans is private mortgage insurance, or PMI. You might ask yourself, “Do I need private mortgage insurance?”
What is private mortgage insurance, anyway, and when and why do lenders sometimes require borrowers to take on this additional expense?
Private mortgage insurance (PMI) can help borrowers qualify for a loan that they might not otherwise be able to get. Whether or not you need it will likely depend on your down payment — the amount of money you are able to pay for a house in cash upfront. It’s important to remember that the insurance protects the lender if you default — it’s not insurance that is payable to you.
A lender will typically require a borrower to obtain mortgage insurance on a conventional loan — one not backed by the government — if the borrower is unable to make a down payment of 20 percent or more. (A conventional loan typically requires a minimum down payment of 5 percent of the sale price of the house.) Mortgage insurance is also required for government-backed Federal Housing Administration loans, which tend to offer a more manageable minimum down payment.
Mortgage insurance will increase the cost of your loan, and experts recommend taking the potential expense into consideration when calculating how much house you can afford. How you pay for your mortgage insurance depends on your lender, according to the CFPB, though it is common for a monthly premium to be added to your monthly mortgage payment. Depending on your loan agreement, you might pay for your mortgage insurance upfront at closing, or you might to make an upfront insurance payment as well as pay monthly premiums.
Click here to learn more about the different types of home loans and potential mortgage insurance requirements by talking to a Mr. Cooper mortgage professional.