The conventional home buying wisdom is that you can’t start looking to buy until you’ve saved up enough to put at least a 20% down. But that’s a big chunk of change, especially when housing prices and interest rates are high. So what are your home buying alternatives if you want to buy sooner? One option is to finance a home purchase with a mortgage secured by private mortgage insurance or PMI.
A mortgage with a PMI requirement protects the lender if you default on the loan. Typically PMI requirements are between 0.5% to 1.5% of the loan amount each year. That means a portion of your monthly payment goes towards the insurance guarantee and not toward the money you owe on your home. The amount you are charged on top of your mortgage may vary or change yearly, or you may be required to make an upfront payment during the closing process of your sale. Your PMI may also be tax-deductible.
Although a PMI requirement means you may pay more money on your mortgage, it is a valuable tool that could help you become a homeowner faster. Your PMI is calculated on your credit score, the size of your down payment or if it’s an owner-occupied property. By looking at these factors, the lender isn’t just considering the size of your down payment but also your history of making payments and sticking to your financial commitments. If you have a good credit score and savings to put money down, that can demonstrate to a lender that you can handle the financial demands of homeownership and meet your mortgage requirements. You can buy a home faster by meeting these requirements and start building equity instead of paying rent.
Another benefit of PMI is that it’s a temporary cost. You don’t pay for it for the entire duration of your mortgage. Sometimes you may only pay it until you’ve reached 20% equity in your home. Most lenders must also cancel your PMI once your balance hits at least 80% of your home. To cancel your PMI status, you must demonstrate a good credit history, show that you’ve reached the required equity status and get an appraisal on your home to present proof of value.
Not all mortgage options have a PMI requirement, even mortgage options with low or no down payment options (*Closing costs and fees may apply). But some do, and that’s not necessarily a bad thing. If a mortgage with a PMI clause helps you to become a homeowner faster, that’s a good thing.