What Is PMI and do I need it?

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What Is PMI


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Private Mortgage Insurance (PMI) is an extra payment that you have to make with your mortgage every month - depending on how much equity you have in your home. If your home equity is less than 20% of the home's value, you might have to pay PMI.

Your home equity is determined by how much money you owe on your home relative to its value. If your home is worth $100,000 and you owe $80,000, your equity is 20%. Essentially, you actually own 20% of your home. If your home is worth $100,000 and you owe $90,000, your equity is 10%. If your equity is below 20%, you should be ready to pay PMI.

PMI is a way for the bank to reduce the risk that you will not repay the loan. If your equity is below 20%, banks have determined that you are a greater credit risk. PMI is insurance that protects the bank from non-payment.

What does PMI mean for you? Depending on the value of your home, PMI can mean an extra few hundred dollars that you will have to pay every month until you own 20% of your home.

The easiest way to avoid PMI is to make a 20% down payment on your home. Right away, buy virtue of your down payment, you will own 20% of your home, potentially saving you thousands of dollars.