The Truth Behind PMI
A stepping-stone to getting in the real estate game, not a cash saving technique
Private mortgage insurance, or PMI, is designed to protect lenders from losing their investment in case a mortgage holder is unable to repay their loan. Utilized as an alternative to a complete down payment of 20 percent, PMIs are generally reserved for first-time homebuyers or those with little equity in their current home. Monthly rates typically range between $30 to $70 for every $100,000 borrowed.
According to Pat Gaver, Residential Division Lending manager at Capital City Bank, PMIs in their most useful form are gateways to letting the next generation of real estate investors get their feet wet in what can be a very pricey pond.
“In your first house, you’re trying to get in there to at least get in the game of not putting your money down the rat hole, because there is certainly no return on your rent,” stated Gaver. “Overall, as an investment, there’s a 3 to 5 percent return on real estate. Regardless, one day you’re going to pay that loan off. But by having that initial opportunity, even though you’re paying to privately insure the mortgage, or you’re accepting the government form of PMI, your next home doesn’t necessarily have to be that way.”
Occasionally, some buyers have opted to keep cash in their pocket by taking the PMI route, allowing other obligations with higher interest rates to take precedence for their money. But experts say this can be a dangerous juggling act and is generally ill advised.
It’s also important to note that PMIs can behave very differently, depending on the type of loan they are insuring.
Once you owe less than 78 percent on your mortgage with a conventional loan, and 24 months have passed since your purchase, you can cancel your PMI policy. For government-backed loans, however, this is never the case, and your PMI is destined to stay with you until the balance of the loan is paid in full.