PMI is private mortgage insurance. It’s a tool, which almost everyone can use while buying a house. With cost of buying a house going up, it becomes difficult to accumulate a traditional 20% down payment. This 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.
How does PMI work?
--You have a 5% down payment.
--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.
--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.
--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 down payment, 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.
