Professor Tate Answers:
To understand this question better, it is important to define some terms, especially for those who are encountering this term for the first time. What is PMI?
PMI stands for Private Mortgage Insurance. When you plan to loan money for your mortgage, the lender requires that you have a private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80% ( the formula for this is: mortgage amount owed / appraised value of your property). This is a way to protect lenders from borrowers that might end up filing for default on your loan due to inability to pay. The lender, in this instance a private bank, requires PMI if the buyer has a down payment less than 20% of the value of the home.
Now, in the advent of Home Affordable Finance Program or HARP, borrowers are given more leeway. The program allows homeowners with higher LTV to avail of refinancing assistance through the Federal Housing Administration (FHA) loans. This was a way for the government to save those nearly “underwater” homeowners to finance their homes.
If you have sufficient money for down payment of the property you wish to buy, then you should stick to the conventional loan with the PMI. You should sit-down with your mortgage broker and discuss this with them so you can see the numbers clearly. The reason for this is that the FHA loan, while credited for being more flexible, can in the long run entail more costs. While it allows for down payments that can go as low as 3.5%, and it has less stringent guidelines than the conventional loan, it does not come without risks.
You asked, now you know!
-Professor Reel S. Tate