PMI - What It Is and Why It's Important

by Toni Itkin 10/06/2019

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. TONI ITKIN  404-229-8242 or [email protected]

About the Author
Author

Toni Itkin

MEET TONI ITKIN

Toni Itkin is a licensed Realtor® serving buyers and sellers across BuckheadViningsSandy SpringsRoswellMarietta, East Cobb, and other high-profile areas of Metro Atlanta. 

Toni began her real estate career in 1992 with Buckhead Brokers, where she earned "Rookie of the Year” before rapidly ascending to her status as a multi-million dollar producer. Since then, she has been consecutively featured in the Who’s Who of Atlanta Real Estate for many years.

Equipped with sharp negotiating skills, an intuitive marketing acumen, and a strong network of professional relationships, Toni is a fierce advocate for her clients. Whether it’s a one-bedroom condo or a multi-million dollar mansion estate, Toni’s ultimate goal is to find her clients a home that perfectly fits their budget and lifestyle. Toni’s reputation for professionalism and trustworthiness in and out of the brokerage community is of utmost importance to her. As a Certified Luxury Homes Specialist, Toni has a finger on the pulse of Metro Atlanta’s luxury real estate market, and as a Certified Relocation Specialist, she is uniquely positioned to provide support for homebuyers who are relocating.

Toni is a member of Georgia Association of Realtors®, National Association of Realtors®, Atlanta Board of Realtors® and Haute Residence’s Luxury Real Estate Exclusive, Invitation-only Network. Toni is also a recipient of the Atlanta Board of Realtor®’s coveted Silver Phoenix Award, which means she’s achieved the organization’s "Multi-Million Dollar Club” status for a minimum of 25 years. As a Coldwell Banker Residential Brokerage agent, she is consistently ranked among the company’s top one percent of agents worldwide and has been recognized as an honoree of the International Diamond Society, International President’s Circle, International President’s Elite, President’s Premier, and Society of Excellence.

Toni is also very active in local charities and civic organizations, including Habitat for Humanity, the Best Friends Animal Society and the Atlanta and Cobb County Humane Societies. In addition, a portion of Toni’s sales commission on every closed transaction goes directly to the Cares Foundation, which makes a difference in Atlanta communities by supporting a variety of local charitable organizations.  She lives in East Cobb and enjoys traveling, playing golf and tennis, and spending time with her pets and her husband, Ernie, a Cardiothoracic Surgeon.