When it comes to buying a home, whether it is your first time or your fifth, it is always important to know all the facts. With the large number of mortgage programs available that allow buyers to purchase homes with down payments below 20%, you can never haveÂ too much information aboutÂ Private Mortgage Insurance (PMI).
What is PMI?
Freddie MacÂ defines PMI as:
â€œAn 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.â€?
Â As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary.Â Freddie MacÂ goes on to explain that:
â€œThe cost of PMI varies based on your loan-to-value ratio â€“ the amount you owe on your mortgage compared to its value â€“ and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.â€?Â
According to theÂ National Association of Realtors,Â the averageÂ down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 5%, while repeat buyers put down 14% (no doubt aided by the sale of their homes). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.
Hereâ€™s an example of 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 the down payment you can make, the lower your monthly housing cost will be, butÂ Freddie MacÂ urges you to remember:
â€œIt’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.â€?
If you have questions about whether you should buy now or wait until youâ€™ve saved a larger down payment, letâ€™s get together to discuss our marketâ€™s conditions and help you make the best decision for you and your family.
Source: Keeping Current Matters