What is PMI?

by Cary Garcia 03/15/2020

Photo by Gino Crescoli via

Pixabay

Private Mortgage Insurance (PMI) may be a common term in home buying, but not every home buyer understands exactly what it will mean for their finances. This short guide will give you the basics, so there are fewer surprises down the line. 

What Is PMI?

PMI is a type of insurance that lenders purchase in case the homeowner defaults on their loan. While the lender will take possession of the home if the owner can't pay their mortgage, they still have to cover the costs of a home sale (e.g., hiring a real estate agent, paying closing costs) as well as possible depreciation. It's the lender who takes out the PMI policy, but it's the homeowner who pays for it. 

Who Needs PMI?

Lenders typically require homeowners to pay PMI if they're unable to put down at least 20% of the home's purchase price. So if the home is $100,000 and the buyer can only put down $10,000, they would need to pay for PMI. Because very few owners are able to come up with such large sums, PMI is a common part of home buying

How Much Is PMI?

Like most insurance policies, PMI can range in terms of total costs. The standard amount is .3 to 1.5% the total cost of the home per year. Homeowners aren't expected to pay the insurance company directly. Instead, PMI payments are rolled into the house payments, and the lender uses the designated amount for PMI to pay the insurance company. 

How Long Will a Homeowner Pay PMI?

Homeowners will continue paying PMI until they reach 20% equity in their home. This is just one of the many reasons why homeowners are encouraged to put as much money as possible into their initial payments. The sooner they start tackling the principal of the loan, the less they'll pay in interest and PMI. That per-year percentage can really add up over time — especially if your interest rates are on the higher side. 

Why Is PMI Necessary?

PMI was designed as a way to prevent lenders from having to raise interest rates. If lenders had to absorb the losses from every default buyer without the help of PMI, they would have to spread the costs out to everyone. PMI is based on the premise that homeowners with less equity in their home (i.e., under 20%) are more likely to default. This way, not everyone has to shoulder the costs with higher rates spread out across the board. 

If you want to know more about what PMI will mean for your finances and how you can mitigate its effects, contact me today to learn more about what you can do.

About the Author
Author

Cary Garcia

Marymount University - BS Finance

Georgetown University - Master's Real Estate

Associate Broker

Northern Virginia Association of Realtors ® Top Producers Club

  

Finding a real estate agent is easy. Finding a skilled agent is the hardest…What separates me from other real estate agents is my extensive knowledge of contract law and the market data of the region. You need an agent who understands the legality of the contract by enforcing the terms of the offer as well as all of the contingencies, addendums and disclosures. Before signing the offer, I will thoroughly explain the contract in detail, so you understand what you are committing to.I bring an expert’s perspective to help buyers and sellers make the right decisions. Because I understand the legal and highly emotional aspects associated with real estate transactions, I am able to provide expert guidance to help you make informed and educated decisions. In addition, I’m very skilled at project coordination. With so many people involved in the home sale process, I know how to create satisfying resolutions and make the process go as smoothly and successfully as possible.

My real estate business has the “clients for life” philosophy where I strive to excel in every aspect of my business, continually reinventing myself as I find better ways to achieve my clients’ goals. I’m constantly learning and reviewing my business, systems and processes, and asking myself: How can I improve my level of service to my clients?

My expertise encompasses all housing types, including co-ops, condos, single-family homes and multi-unit buildings. I welcome first time homebuyers, owners wishing to sell their homes, trade up or acquire income-producing properties. In addition, I warmly invite those interested in relocating to Virginia, Maryland and Washington, D.C. 

With an in-depth view of the market, I know where to locate the properties that compliment your wish list and lifestyle. Moreover, when it’s time to sell, my innovative appraisal approach will help to appropriately price your property for maximum financial return. I focus on marketing that is effective – that is why I relentlessly track what works and what does not.

I recognize the common thread in each and every real estate transaction is a client with similar needs: exceptional customer service, an agent who understands the contract, neighborhood expertise and professional guidance throughout the process. I embrace all of these needs and work diligently to cater to them on every level of my business. I know Virginia, Maryland and Washington, D.C. areas very well and know what it takes to earn a stellar reputation for giving clients’ what they ultimately want. I take this responsibility seriously and work tirelessly to ensure you receive all the information you need to make sound decisions that will affect your future. So when you’re ready to buy or sell property in Virginia, Maryland and Washington, D.C., set your sights high and give me a call. 

My expertise, dedication and perseverance will ensure your next move a complete success. I will help you achieve it.

TESTIMONIALS

Cary was fantastic in all respects. We will definitely recommend him to others. He went way above and beyond what was necessary in our first home buying experience.

– Barry Kennedy and Amy Kennedy

If it wasn’t for Cary’s hard work, we would not have the house we are now living in. … He was always patient, kind and informative. We knew that he was always on our side and trusted his judgment. He worked so tirelessly for us, without reservation. I highly recommend him to anyone looking for a house in the Washington area.

– Daniel and Christine Mullins

Cary was very professional from the very beginning. He kept us informed throughout the whole entire selling process. Eventually…he helped us buy our next home. We will recommend him highly.

– Dr. Deborah Jones & Dr. Gregory Miller

For the past six years we have had a business relationship with Mr. Cary Garcia. He was our realtor during the purchase and sale of our home. … No detail was too small and nothing was overlooked. … I would recommend Cary Garcia to anyone looking for a hard working and trustworthy professional.

– Marc and Mona Lisa Gittleman