Lenders typically require borrowers to have
at least a 20% equity position1 on conventional loans.
Private mortgage insurance (PMI) allows borrowers to have a
reduced down payment or lower equity in the property being
financed. If you do not have 20% in equity or down payment, the
lender will require private mortgage insurance (PMI).
PMI insurance is paid by the borrower. The payment is included in the regular house payment.Advantage:
The advantage to PMI is that it allows you to make a down payment of less than 20%. As a form of financial leveraging PMI may be a good investment vehicle. In other words, you may get a better rate of return on investments made with the money you could have used for a down payment.
A second advantage is that you may purchase a larger home with a lower down payment. You can purchase a home with as little as 5% down using PMI. With $10,000 you could make a 5% down payment on a $200,000 home or put 20% down on a $50,000 home2.
Additionally, you may be able to purchase a home sooner. If you are finding it difficult to save for a down payment faster than the increase in housing prices, PMI will enable you to stretch the money you have saved by allowing a smaller down payment.Disadvantage:
The disadvantage of PMI is the cost. You are required to have PMI included in your monthly payment. The payment amount for PMI is calculated using a variety of factors: loan amount, loan type and percentage of down payment (loan-to-value, LTV). Traditional monthly PMI on a $100,000 thirty-year fixed rate loan with a 10% down payment (sales price of $111,111) will run about $43.33 per month.
1. value is determined using the lesser of the purchase price or appraised value
2. downpayment is exclusive of closing costs, prepaid items, and required reserves, if any