Okay it’s not technically a word, it’s an acronym for three words – Private Mortgage Insurance.
‘Mortgage Insurance’ sounds like it should be a good thing, right? Health Insurance, Life Insurance, Car Insurance.. they’re all there to help you out in case disaster strikes. Not Mortgage Insurance. It’s only there to protect the bank. The bank thinks that if you have less than 20% equity, you’re at risk of defaulting on the loan because you don’t have that much of your own money at risk. So, they make you buy PMI, in order to protect themselves. It can range from $100 to several hundred dollars a month and you pay it until your share of the Equity hits 20%. With some loans you can drop the PMI when you hit 20%, with others (like an FHA loan) you need to refinance into another loan in order to drop it.
Sounds like a giant waste of money, right? Well, not always. If paying PMI for a few years allows you to get into the real estate market, I generally think it’s an advantage.
Here are a few ways to make PMI work for you: