If you have never purchased a home (or had at least 20% down when purchasing), you may be wondering, what the heck is PMI? PMI stands for Private Mortgage Insurance and is an extra fee that lenders will tack on to your loan if you provide less than 20% down on a home purchase loan. PMI is explained as extra protection that lenders charge when loaning in the case of your default on the loan. The higher percentage of value they loan on a home, the riskier of a loan profile it is. To combat this risk, they collect money from you monthly over time until you reach 78% of the loan balance or you have over 20% equity in the home (for conventional loans). However, make sure you keep on the lender about these numbers, as it isn’t always done automatically. PMI rates will vary based on the loan type (conventional loan PMI will differ from FHA, VA, USDA) but you can expect anywhere from .55% to 2.25% of the loan amount on a home (according to bankrate.com.) On a home loan of $250,000, this could range from around $136 a month to over $560 a month.

While these percentages may not seem like a lot, compounded by the magnitude of the loan, they can become extremely costly for the average homebuyer. The amount is impounded into your payment and becomes a part of your monthly obligation until it is no longer required. Beware, however, that with some loans (such as FHA as of right now), the PMI will be required for the life of the loan, regardless of the equity you have. In these cases, in order to remove PMI, you would need to refinance altogether. PMI has been a hot button in matters of tax deduction. For some time, PMI was allowable as a tax write off, but as of 2018, this is no longer the case. The future of PMI as a tax deduction looks bleak at this point.

With all these factors going against PMI, one may wonder why someone would opt to sign on a loan with PMI at all. While there are obvious negatives, there are also some very convincing positives to picking up a loan with PMI. To start, loans that don’t require a full 20% down payment make homeownership more available to many people. While there are many people who can afford the monthly payment, there are fewer people that would be able to save a down payment in a reasonable amount of time, especially in higher-priced markets. By coming in with as little as 3% down to get into a home in some circumstances, it also lowers the risk for the borrower in the case that they lose their home. With interest rates at historic lows, some people opt to put less down on their home and invest their saved money in higher yielding investments as a purposed strategy.

Aside from PMI, some lenders currently offer additional programs to minimize PMI payments. For example, some lenders will offer a lender paid MI program, which for a slightly higher interest rate (usually in the ballpark of 1⁄8 to a 1⁄4 percent) you can opt to have your lender “pay” your mortgage insurance. The monthly total typically comes out to less than it would with PMI, but the interest rate you are accepting will stay for the life of the loan, unlike PMI on a conventional loan. However, as of right now, since the amount is built into your interest rate, it is in most cases tax deductible (check with your accountant, we are not tax pros.)

Deciding whether PMI is a “good” or “bad” thing is a completely individual decision. When weighing out the right option for you and your family, take all the factors into consideration. For some people, the option of obtaining a loan without 20% down is a huge deal, despite the added cost. While for others, with a little more savings, they can avoid this altogether, making a loan with PMI a less desirable option. Whatever you choose, stay within your means when buying a home and stay aware of all the options you have. Stay focused on your overall financial health and steer in the right direction!