Sacramento Real Estate Blog

I’m working with a buyer who recently had some questions for his lender about PMI, or Private Mortgage Insurance. In the course of discussions with him, I ran across two good articles about PMI.

The first article has an especially clear discussion of PMI in the beginning part of the discussion, though I’m not sure I agree with the latter part of the article (beginning with “The Value of an Investment in Home Equity”). I haven’t formed an opinion on that part, but I cite this resource mainly for the good information at the beginning of the article.

The second article that stands alone in its entirety somewhat better, but is a little more general in scope, is the informational article at Bankrate.com, that talks about PMI and what some of the alternatives are.

My take on PMI is that it’s important for consumers to understand these things about it:

• If you need to borrow more than 80% of the value of a home, as many people do in California, PMI is one traditional (and sometimes still good) way to get this done.
• PMI protects the lender, not you! It does not insure you against anything should you default on the loan. PMI is a premium that protects the lender against the higher risk that they incur when lending you a larger percentage of the purchase price.
• More recently the mortgage industry has come up with alternatives to PMI such as “second notes” (see Bankrate’s discussion of the 80/10/10 plan). In many cases, the total payment for such a scenario is lower than it would be for the cost of a loan plus PMI. Also, assuming you don’t get a prepayment penalty on the second loan, you have the option of paying off this second (higher interest) loan, on an accelerated schedule if you wish.