How PMI Can Help You Buy a Home

What is PMI? It is Private Mortgage Insurance, and it may be your savior when it comes to buying a home in this market. With home prices at the highest levels ever, and limited inventory to choose from, competition for affordable homes is fierce - especially with recent mortgage rate increases reducing purchasing power for many buyers.  

PMI works by lowering the traditional 20% down payment requirement for obtaining a mortgage. That 20% can be a hefty amount for anyone to save, nevermind with higher home prices. PMI allows for as little as 3% down, making it possible to buy a home far sooner. There are four significant ways PMI can help buyers:

- Afford a Home Sooner. Waiting to save a 20% down paymnet can be a huge barrier, and as home prices continue to rise, the savings needed also increase.  With PMI, you a buyer can purchase a home with as little as 3% down and begin to build equity and long-term wealth

- Increase Your Budge. If a buyer is struggling to find the right home in the approved price range, PMI can help increase purchasing power by putting a lower percentage down on a more expensice home. For example, if a buyer is planning to put a 20% down payment on a $300,000 home, he may be able to use the savings from the down payment differential to purchase a $400,000 home.

- Cover an Appraisal Gap. PMI can also work for buyers facing an appraisal gap (a property appraising for less than the contracted purchase price). PMI may be able to be used to shift the loan-to-value (LTV) and restructgure the loan so a buyer can cover an appraisal gap and still have enough money to meet the minimum down payment requirement.

- Preserve Savings. Even if a buyer can afford a 20% down payment, a lower down payment with PMI may be preferred, as it provides an opportunity to set aside some cash as a cushion for unexpected economic times or repairs and maintenance items that may come up.

Of special note is that most PMI products are temporary. Once the homeowner makes a certain number of payments or the property appreciates to a certain loan-to-value ratio and  meets loan seasoning requirements, the insurance may be eligible for cancelation. When home prices go up rapidly, as they have in recent years, the payment can drop away even faster.

Be sure to speak to your mortgage professional to discuss the pros and cons of PMI, and to get specific information on how PMI works.