Today I wanted to talk to you about PMI. What is it and why does it matter to a homebuyer in today’s market?
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Congratulations on starting the exciting journey to becoming a homeowner! To be an informed buyer, you want to get all the pertinent facts that could affect your purchase, your buying power, and your long-term expenses in your home.
Today I wanted to talk to you about private mortgage insurance. Private mortgage insurance, or PMI, is an insurance policy that protects the lender if you’re unable to pay your mortgage. This insurance is something you cannot afford to ignore. It’s a monthly fee rolled into your monthly payment that’s required for all non-conforming, conventional loans with a down payment of less than 20%.
If you’re making a down payment of 20% or more, PMI won’t affect you. However, for the vast majority of clients, this isn’t the case. FHA loans permit you to have a down payment as low as 3.5%. The average down payment for all buyers last year was 10%, so PMI is definitely in the picture for most homeowners in 2017.
For first-time buyers, the average down payment was 6%. For repeat buyers, that number jumped to 14%, as they most likely were aided by the sale of their previous home. These numbers show that PMI did not stop buyers from purchasing their homes.
The larger the down payment you can make, the lower your housing cost will be.
As the borrower, you pay the monthly premium for the insurance policy, and the lender is the beneficiary. That monthly premium is determined by your loan-to-value ratio and your credit score, but you can expect to pay between $30 and $70 for every $100,000 borrowed.
The larger the down payment you can make, the lower your housing cost will be. However, the PMI enables you to buy your home now and start building equity in the home rather than waiting five to 10 years to save enough for a 20% down payment. Once the equity in your home reaches 20% of the home’s value, you are then able to cancel the PMI and remove that expense from your monthly housing payments.
If you have questions about whether you should buy now or wait until you have saved a larger down payment, or any other questions about buying or selling a home, please don’t hesitate to call me. I would be happy to help you.
