PMI, I Don't Want PMI! What is PMI?

In today's mortgage market PMI can be a key part to you getting a mortgage. While not all loans require PMI many do if you are putting down less than 20% of the purchase price.

PMI A.K.A Private Mortgage Insurance

It is an insurance policy which lenders often require you to have when you purchase a home with less than a 20% down payment. The insurance protects the lender but you get the priviledge of paying for it.

There are some loans that do not have PMI. USDA Rural Development loans, VA loans and some portfolio products do not require a buyer of a home to have PMI. If you are buying today your lender should be able to explain what loan is best for you, not for them, and if PMI is required they should know why and when you can get rid of it.

Some reasons why PMI might make sense:

1. You are putting almost 20% down and/or you are buying a home at a discount so that you might be able to eliminate the PMI in a year or so. (Government loans such as USDA and VA don't have PMI but they do have a very steep Government funding fee which is rolled into your loan amount. VA is typically 2.15% and USDA is 2.0408% of your loan amount.)

2. You will be selling the home in the very short term and the PMI fee you would pay over time is less than the government funding fees.

3. You have great credit and you're looking to do a conventional loan rather than a government loan. Governmnet loans often have interest rates that are .25% or more higher than a conventional loan when you have great credit scores.

Please note that PMI is possibly tax deductible for you. (ALWAYS check with your CPA before assuming that. ) I am not your CPA!

Before you think that I am pro PMI let me set the record straight. I believe it has it's place in the mortgage industry but seldom do I think it is the best.

There are few people out there these days with credit scores above 740 and even fewer people with a 20% down payment. While every situation is different more often then not using a government loan is a better solution for people.

Here are a few reasons for that:

1. Your monthly payments are often much lower. A government funding fee rolled into a loan might only raise the monthly payment $4 - $15 per month. PMI on a similar size loan could be $80 to $150 or more added to the regular monthly payment.

2. With uncertain times I would rather have liquid cash on hand rather than putting a bigger down payment on my house because if anything ever happened I have more cash to fall back on. Try to refinance your home to take the money back out when you have lost your job.

3. Many people have other debts besides a mortgage that they are responsible for. Auto loans, credit cards etc. All typically at higher interest rates than their mortgage. Often times it makes sense to use extra cash if you have it to payoff your other debts, use a government loan to not tie up your money with a large down payment and improve your monthly cash flow.

(For Example - you have an auto loan at $350 per month fo the next 24 months.) If you pay off the car loan you improve your monthly cashflow by $350 - the additional monthly mortgage cost. Lets say it is $15 higher for the PMI and another $45 higher because you have a larger loan amount. That leaves you $290 per month up. You could take half of that money and add it monthly to your emergency fund and put the other $145 as an additional principal payment on your mortgage each month. If things got tight your monthly obligations are still $290 less then they would have been.