What You Need to Know About Private Mortgage Insurance
Whether it is your first time or your fifth, it is alwaysimportant to know all the facts when it comes to buying a home.With the large number of mortgage programs available that allowbuyers to purchase homes with down payments below 20%, you cannever have too much information about Private MortgageInsurance (PMI).
What is PMI?
Freddie Mac defines PMI as:
“An insurance policy that protects the lender if youare unable to pay your mortgage. It’s a monthly fee, rolledinto 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 cancancel your PMI and remove that expense from your mortgagepayment.”
As the borrower, you pay the monthly premiums for the insurancepolicy, and the lender is the beneficiary. FreddieMac goes on to explain that:
“The cost of PMI varies based on your loan-to-valueratio – the amount you owe on your mortgage compared to itsvalue – and credit score, but you can expect to pay between$30 and $70 per month for every $100,000borrowed.”
According to the National Association ofRealtors, the average downpayment for all buyers last year was 13%. For first-timebuyers, that number dropped to 7%, while repeat buyers put down 16%(no doubt aided by the sale of their homes). This just goes to showthat for a large number of buyers last year, PMI did not stop themfrom buying their dream homes.
Here’s an example of the cost of a mortgage on a $200,000home with a 5% down payment & PMI, compared to a 20% downpayment without PMI:
The larger the down payment you can make, the lower your monthlyhousing cost will be, but Freddie Mac urges youto remember:
“It’s no doubt an added cost, but it’senabling you to buy now and begin building equity versus waiting 5to 10 years to build enough savings for a 20% downpayment.”
Bottom Line
If you have questions about whether you should buy now or waituntil you’ve saved a larger down payment, let’s gettogether to discuss our market’s conditions and help you makethe best decision for you and your family.