PMI - Private Mortgage Insurance

If you don't have the required down payment for a conventional mortgage loan then you may be subject to PMI, or private mortgage insurance. The average cost of buying a home goes up each year, making it more difficult for first time home buyers to accumulate a traditional 20% down payment. Move-up buyers struggle to find down payment funds, too, especially if they haven't been in their current home long enough to see a significant increase in equity.

The good news is that there are plenty of loan choices for home buyers who do not have a large down payment. An FHA loan is one way to buy a home without a large downpayment, but loan caps are in place and they vary depending on where you live. You also need to have fairly good credit in order to qualify for an FHA loan.Another option is a VA loan, where no downpayment is needed at all, but you must be a veteran of the US armed forces to qualify.

One home buying aid that nearly everyone can use is Private Mortgage Insurance, or PMI. This special insurance protects the lender if you default on your home loan. PMI makes it possible for you to purchase a home with as little as 3-5 % down. Just remember that your monthly payments will be higher due to the fact that you are putting less down and therefore paying off less of the initial pronciple. Plus you have to add on the cost of the monthly PMI premium.

Here's How PMI Works: You have a 5% downpayment. The lender wants to finance 80% or less of the home's value, since studies show that buyers who put less down are more likely to default. The lender secures a private mortgage insurance policy for you and closes on the loan. If you default on your mortgage loan, the lender receives the 15% you did not pay at closing.

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