What is PMI? Get All the Facts Today
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 a home with a down payment below 20%, you can never have too much information about Private Mortgage Insurance or PMI.
What is PMI?
Historically, the less a homeowner has invested in a property, the higher the chance the owner will walk away from it if payments fall behind. PMI protects lenders against the higher risk of low-down-payment loans by paying the losses if those loans go into default.
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%.”
As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:
“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.”
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% (no doubt aided by the sale of their home). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.
Here’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, but Freddie Mac urges you to remember:
“It’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.”
Of course, the home owner will pay higher monthly payments to cover the cost of the PMI insurance. But the payment doesn’t last the life of the loan. Once a homeowner’s equity reaches 20%, PMI insurance can be cancelled, along with monthly PMI payment.
If you are currently paying PMI or if you’re thinking about buying ahome with less than a 20% down payment, the information in this report could save you thousands of dollars.
Your Legal Rights
The Homeowners Protection Act of 1998 stipulates that lenders must automatically cancel private mortgage insurance (PMI) once an owner’s home equity reaches 22%. The law will save many qualifying homeowners thousands of dollars each year by eliminating their PMI payments. But other qualifying homeowners will save even sooner.
Why? Because the savvy homeowner knows the law also requires a lender to cancel PMI at the 20% equity level if the homeowner makes a written request. Without a written request, the lender is allowed to continue charging PMI until the owner’s equity reaches 22% on the loan pay-down schedule.
Request vs Automatic
If you have reached 20% equity in your home through payments and market appreciation, then you can request to have PMI eliminated. This was always the case before 1998 law, but most homeowners didn’t know they had the option to do so. Now, however, the law requires lenders to send letters to homeowners, letting them know they’ve reached enough equity in their home from loan pay-down to cancel their PMI policy. But they are not required to send those letters until the equity reaches 22%.
For automatic PMI cancellation, lenders calculate equity using the amount of payments made and the original loan amount. Market value is not considered. To establish equity gained from appreciation, you must order (and pay for) a professional appraisal of the property’s worth.
If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and to help you make the best decision for you and your family. Schedule your free no obligation consultation today!
And please, don’t forget to download
My Buyers’ Guide:
“Things to Consider When Buying a Home”
As a home buyer, there’s plenty you need to know. You’re about to make the largest financial investment of your life, but with my Home Buyers Guide, you’ll have the information you need about buying a home, right at your fingertips.
Here’s what you will find inside:
- The Cost of Renting vs Buying
- 2 Myths That Might be Holding You from Buying
- Why Pre-Approval Should be Your First Step
- What You Need to Know About Mortgage Process
- What to Expect When Home Inspecting
- And More!
The best part is, our Guide is free and available to download right now. All we need is your name and email, and we’ll send it directly to you.