FYI about PMI – Private Mortgage Insurance

FYI about PMI – Private Mortgage Insurance

Understanding the lending process is crucial for all home buyers, especially if it is your first time. When you are applying for a mortgage, you should know the facts on Private Mortgage Insurance (PMI) so you can make the right choice on your new home sweet home …and how much you pay for it.

 Do I need private mortgage insurance?
 Choose your own adventure:  Do you have 20% of the purchase price to put down in cash? 

  • If you answered YES, you do not need PMI, but this article will still be informative
  • In you answered NO, you need PMI* and should definitely keep reading.

*There is an option called 80-10-10 mortgages, involving multiple loans and multiple closings, which is a rabbit hole for you to explore.

Simply put, if you are applying for a conventional loan, and you don’t have 20% of the home purchase price to put down in cash, your lender is taking a greater risk on you. The lender is investing more heavily in the property, and you are required to purchase a policy to protect the lender. This policy is called Private Mortgage Insurance, or PMI.

Food for Thought: In 2017, the majority of homebuyers purchased their home with a down payment of 6% or less. (National Association of REALTORS)

So.. what exactly is PMI?

Freddie Mac defines PMI as

“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.”

How much extra per month are we talking?

PMI is dependent on your loan amount. Let’s take a look at a few scenarios for putting 5, 10, 15 and 20% down on a $200,000 home purchase.

Payments for a $200,000 house with a 30 year fixed-rate loan, with 4.5% interest*

5% down10% down15% down20% down
Down Payment Amount$10,000$20,000$30,000$40,000
Loan Amount$190,000$180,000$170,000$160,000
Total monthly Payment$1112$1,005$915$811
*does not include home insurance or property taxes
(Source: Freddie Mac PMI calculator)

It’s obvious isn’t it?  The more you can afford to put down, the lower your payments.

But remember, there is light at the end of the tunnel! As soon as you hit 20% equity (aka 80% loan-to-value), you can cancel that PMI policy for good! And don’t worry. Even if you forget to cancel, your lender is legally required to cancel PMI for you when you reach 78% loan to value.

What’s the bottom line?

For the lowest monthly payments, it is advisable to put as much cash down on the loan as you can. However, if you are concerned that real estate prices may rise in your area or saving 20% down is not a realistic option, taking out a loan with private mortgage insurance may be the right choice for your entry to the housing market.

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