Here’s some good news: After falling through the floor in the aftermath of the 2008 financial crisis, housing prices are finally enjoying a sustained upswing. According to the CoreLogic Home Price Index, year-over-year home prices rose by an impressive 11.8% in 2013, making it the best year for home price appreciation since 2005. According to the Case-Shiller Home Price Index, the U.S. housing market is “on a roll,” with year-over-year gains of over 20% in some parts of the country. After years of fretting, you may now be sitting on some valuable home equity you didn’t even know you had! The question is, how can you harness that increased equity?
Private mortgage insurance, or PMI, gets a bad rap. I mean, no one likes to spend extra money if they can avoid it, right? But what happens if you can’t avoid it? What if you’ve found the house of your dreams but don’t have 20% saved for a down payment? Let’s explore the ways that PMI can help get you into your perfect home.
What Is PMI?
According to our mortgage glossary, PMI is insurance that protects the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20% of the home’s purchase price. PMI is generally included in your monthly mortgage payment.
How Can I Benefit from PMI?
If you don’t have a 20% down payment, PMI can help you buy a home. By financing your home with mortgage insurance, you could make a smaller down payment on a more expensive home. While not necessarily always ideal, accepting initial PMI in order to purchase a higher-priced home doesn’t mean you’ll always be locked into paying private mortgage insurance. In fact, on some loans, PMI can be cancelled when your loan balance is below 78% of its original value. Once your mortgage insurance is cancelled, your monthly mortgage payment will be reduced by the amount of your mortgage insurance payment.
Another way you can leverage PMI is by opting for lender-paid mortgage insurance (LPMI). This means the lender agrees to waive the private mortgage insurance in exchange for the borrower paying a higher interest rate. If you have a higher credit score, this may be a great option for you. Be sure to talk to a Home Loan Expert to find out if this is the right way to organize your mortgage.
Mortgage insurance is an expense; there’s no getting around that. But it’s important to weigh all of the pros and cons of adding this expense, and sometimes mortgage insurance can give you stronger positioning and buying power.
Think of it this way: You might be paying monthly mortgage insurance for a number of years, but depending on your financial situation, saving an additional 15% for a down payment could take a long time. If you opt for mortgage insurance, you could be living in a home that you own rather than spending money on rent while you’re trying to save.
Want to play around with some numbers? Check out our current mortgage rates and our mortgage calculators to start figuring out how these numbers work for you. Got any thoughts on the pros and cons of mortgage insurance? Let us know in the comments!