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 have too much information about Private Mortgage Insurance (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.”
“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.”
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 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.
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.”
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 help you make the best decision for you and your family.
"Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.
PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required." -Consumer Financial Protection Bureau
But one secret most home buyers DON'T know is that you can pre-pay that PMI during closing and save yourself hundreds of dollars each month over the early life of your conventional loan. That's right, you can PREPAY it. And, if the seller is paying some of your closing costs, your lender may be able to apply any leftover seller paids to assist in the paying down of your PMI.
From Amy Prater, NBH Bank/Bank Midwest, one of our preferred lenders at Urban KC Living and KC Condo Source:
"Everyone hates the idea of mortgage insurance, right. What if I can show you a smarter way to pay for mortgage insurance. I have put together two scenarios on the same property that will take some of the stings out of having to pay that insurance.
On a $160,000 purchase with 5% down ( $8000) your monthly mortgage insurance is $45.89 per month. That mortgage insurance will automatically drop off at payment 114. That is a cost of $5231.46 for that insurance.
You also have the option of paying that mortgage insurance premium at closing like it is a regular fee. The cost of that single pay premium is $2615 for the exact same offer. So this is saving you $2616 in premiums. More than $2,600 a year in PMI savings, could equal multiple extra mortgage payment each year which would mean your loans would also pay off quicker!
When should you consider paying the premium up front? When you know that this is a long-term home, meaning over 10 years. This might also be a smart idea to do if you are trying to maximize your buying power. By eliminating $45.89 per month in your mortgage payment that would give you an additional $10,000 in buying power. So you go from being able to qualify for a $160,000 house to a $170,000 house and your realtor can show you just want an additional $10,000 in buying power can do. I think it just might surprise you."
For more creative ways to maximize your buying power, give our team a call or drop us a quick email today: 816.699.0084 OR Team@UrbanKCLiving.com.