What is PMI and Do I Need It?

The village of Auvernier
Creative Commons Licensephoto credit: Tambako the Jaguar

Homeownership is a goal for the majority of Americans. Often the ins and outs of homeownership and mortgages are confusing and overwhelming. One area that can be quite confusing is private mortgage insurance (PMI). Many times new and potential homeowners have no clue what PMI is, who needs it, and if it is always necessary.

First, what is it? PMI is an insurance often required by mortgage lenders. Typically, to secure a loan a buyer must put 20% down on the loan. This makes homeownership an impossibility for many individuals. For those buyers who don’t have 20% to put down, lenders will usually require the buyer to purchase PMI to protect the bank in case the buyer defaults on the loan and the home goes into foreclosure.

Do I need it? As stated earlier, many times there will not be an option. If you only have 3% to 5% as a down payment then you won’t have a choice. You will be required to take out PMI, to cover the bank’s “riskier” investment and loan. The question of do I need it is quite complicated. If you think there is a chance you might default on the loan it could be handy to have, considering it covers the loss the bank will take in foreclosure. That won’t remove the foreclosure from your credit history but, it may allow you to come out of that foreclosure without an outstanding balance owing on a home you no longer have. On the other hand, not having it will lower your mortgage payment each month, making those payments easier to pay, keeping foreclosure at bay.

Should I cancel it? Once you have paid over 20% of the principal, you can select to cancel your PMI coverage, which will more than likely lower your payment, since PMI premiums are often included in the monthly mortgage payment. The decision is yours. You have to weigh the pros and cons before deciding to cancel but, make sure you pay attention to your principal paid and don’t forget to make the choice, when the time comes.