For many homeowners, their mortgage payment contains more than just principal and interest. A little something called PMI could be representing a significant portion of that payment, and it's important for home buyers to understand this cost.
What Is PMI?
PMI stands for private mortgage insurance, or sometimes just mortgage insurance. However, it isn't intended to mitigate risk for the homeowner, but rather the bank.
Statistics show that when a home buyer puts less than 20% down on a home, he/she is much more likely to default. So, requiring these buyers to carry PMI helps the bank hedge their losses in the event of a default.
It's important to note that the home buyer doesn't shop for PMI; this is all taken care of by the lender. However, the cost of PMI should be calculated out well before closing to help the home buyer be aware of his/her final mortgage payment.
Who Needs PMI?
Who will need to carry PMI depends on factors like the credit rating of the buyer and the exact mortgage being sought out. However, it's safe to say that most home buyers with less than a 20% down payment will be required to carry PMI.
Should Those Who Cannot Put 20% Down, Not Buy A House To Avoid PMI?
Unfortunately, this is not an easy question to answer. Yes, PMI is an extra cost that needs to be calculated into the cost of the home – but putting off a home purchase isn't necessarily the right course of action.
For many families, it's financially challenging to save up 20% of the cost of a home. However, many find that it's still cheaper, or just financially wiser, to buy a home with PMI than to continue renting.
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