Private mortgage insurance (PMI) has historically been viewed negatively by homebuyers who want to avoid the extra costs associated with it. However, recent changes have made PMI more affordable, and some experts now advocate for its use. By leveraging PMI, borrowers can make lower down payments (as low as 3%-5%), leaving more funds available for other uses. Interestingly, PMI is a temporary cost, automatically canceling at certain thresholds. This has prompted some homebuyers to reconsider alternative strategies like piggyback loans which can incur higher costs.
I am a big fan of mortgage insurance - and it's kind of a dirty word. When you talk to customers, they don't tend to like it, says Emanuel Santa-Donato, senior vice president at Tomo Mortgage. But if you look at the actual cost of the mortgage insurance relative to being able to put down 3% or 5%, it is quite advantageous. That money could be used elsewhere.
PMI is a requirement for conventional mortgage borrowers who make a down payment of less than 20% on a home. Although the borrower pays for coverage, PMI protects not the borrower, but the lender.
Even before the scheduled date, though, you can request that your lender remove PMI once you pay down your balance to 80% of your home's original value.
For years, homebuyers have been so opposed to paying PMI that they've jumped through hoops, such as getting piggyback loans. With this type of loan, a buyer makes a 10% down payment, then takes a second mortgage for the other 10% - avoiding PMI, but incurring additional closing costs.
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