The words “private mortgage insurance (PMI)” often carry a negative connotation. After all, it’s an insurance premium that has no direct benefit to the borrower, and it’s often seen as a type of “penalty” for putting down less than 20 percent on a mortgage. But, it can actually be advantageous to buyers. Here are a few “pros” that might make you change your mind about PMI.  

What is PMI?  
When you purchase a home using a conventional loan and make a down payment of less than 20 percent, PMI may become a part of your mortgage payment. PMI is a form of insurance, paid for by the borrower, which protects the lender against financial loss in the event of foreclosure.  

The monthly premium is calculated using a risk-based pricing model just like any other type of insurance, and the fees vary, depending on your credit score, down payment amount, and loan amount. 

Patty Leonard, senior residential loan officer with Independent Banks, says overall, PMI is more affordable than it was years ago, especially for those with higher credit scores.  

“I just had a client with a credit score of 800 and her PMI was 0.2 percent of the total loan amount,” she said. “On a $150,000 loan, that’s only $25 a month.”  

Your loan amortization schedule will list the date when PMI will be canceled, which is typically when a borrower reaches 22 percent equity (78 percent loan-to-value). However, you can request to cancel PMI earlier if you’ve made additional payments that reduce the principal balance of your mortgage to 80 percent loan-to-value. Whether or not it’s removed at that time is up to the lender, and they may require an appraisal to prove the value of the property.  

What are the pros?  
The biggest benefit of PMI is that it gives you the ability to buy a home without waiting to save for a 20 percent down payment.  

On a loan of $150,000, a 20 percent down payment be $30,000. That’s on top of the money needed for closing costs and other expenses like moving services, updates or improvements, furniture, etc.  

PMI also helps approved buyers obtain conventional mortgages with a lower down payment, which can be preferable to government-backed products, like FHA loans. While FHA loans allow buyers to put down as little as 3.5 percent they may have higher fees and may require borrowers to jump through more hoops. FHA loans also require mortgage insurance, but unlike conventional products, it must be paid for the life of the loan.  

Another benefit of PMI? It gives you the ability to leverage your money. Maybe you have enough for a 20 percent down payment but using it all would completely wipe out your savings — something that is never recommended when buying a home. Or maybe in order to make the 20 percent, you need to pull funds from other investments. PMI can be thought of as the fee you pay to keep your money in the bank, giving you greater flexibility and more financial security.  

“When interest rates are low like they are right now, there are probably better ways to invest your money,” said Leonard. “If you’re making a 7 percent return on an investment, it’s more profitable to leave your money there instead of pulling it for a larger down payment on a mortgage with only a 4 percent interest rate.”  

But like any financial decision, Leonard says it’s important to consult with a reputable lender.  

“For instance, if I have a client with a lower credit score, their PMI rate on a conventional product could be double what the rate would be on an FHA loan,” she said. “Analyzing each borrower’s individual financial profile is the key to determining the right loan product for their needs. Ultimately, it’s the client’s decision, but I like to run the numbers and explore all options so they can make an informed, confident decision.”   

For a list of local area lenders visit the Greater Lansing Association of REALTORS® at www.lansing-realestate.com.