Private Mortgage Insurance Facts
Whether you are a first time home buyer or have owned several homes, it’s important to know the facts. With the number of mortgage options available to buyers putting less than 20% down, you can never have Too Much Information (TMI) about Private Mortgage Insurance (PMI).
What is Private Mortgage Insurance (PMI)?
According to Freddie Mac PMI is:
“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.
Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.
“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.”
As the borrower, you pay a monthly monthly amount which is part of your PITI for the insurance policy. Your lender is the beneficiary. According to the National Association of Realtors, the average down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 6%, while repeat buyers put down 14%. This confirms that a PMI payment did not stop a large number of buyers from purchasing a home.
This chart illustrated the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:
The larger your down payment, the lower your monthly housing cost will be. It’s important to remember that even though PMI adds to your monthly payment, it allows you to buy a home now and take advantage of equity appreciation as opposed to waiting 5 or more years to save enough money fora 20% down payment.
Real Estate Bottom Line
If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, please reach out to me so we can discuss your particular situation.