PMI: Avoid it or embrace it?

If you’ve used an online mortgage calculator, you’ve likely considered how to factor in or avoid PMI.

What is PMI? 

Private mortgage insurance (PMI) protects the lender in case a borrower defaults on their loan payments. As a home buyer, you might be required to purchase PMI if your down payment is less than 20% of the purchase price. PMI is typically charged as an additional payment on top of your monthly mortgage payment.

Understandably, home buyers are often concerned that paying PMI on top of their monthly mortgage could hamper their affordability. (An extra $200 per month could be equivalent to $40,000 in purchasing power.) But is that still true, and what are your options?

For nearly a decade, interest rates have been so low (hovering between the mid-3% to mid-4% range) that even with less than 20% down, overall monthly payments have become less onerous.

But there’s a new reason that paying PMI has become more affordable

PMI is now cheaper than it used to be. Over a decade after the 2008 financial crisis––and with much stricter lending guidelines––insurance companies are now sufficiently confident to offer affordable mortgage insurance rates. PMI can now be as low as $40 to $100 per month for a loan amount of $500,000.

What about “lender-paid” PMI?

For a number of years, buyers purchasing with at least 10% down could opt to have their PMI payment factored into their already-low interest rate, rather than as an added monthly fee. Often, it could be more affordable to pay an extra 0.125% rather than an extra $150 per month, for example. One downside of this approach is that you pay that higher interest rate ongoing for the life of the loan, even after your ownership stake in the property reaches 20%.

Why paying that monthly fee makes sense again 

With PMI fees dropping, paying that monthly sum has reclaimed its advantage: PMI payments can eventually go away.

It’s always been true that once your property’s equity (the portion of the home’s value that you own) reaches 20%––either by virtue of the property’s market value increasing (which is typical in the Boston area) or due to paying down the mortgage over time––the lender will remove the private mortgage insurance.

So with this now cheaper approach, borrowers can confidently opt for a PMI loan and still afford the price range they’re interested in.

To determine the best loan structure for your particular needs, you can contact our lender colleagues the Andrew Marquis team at Guaranteed Rate.