Are you looking at buying a home and putting less than 20% down? Your loan will require you to purchase private mortgage insurance, or PMI.
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PMI is private mortgage insurance. It is essentially an insurance policy that protects the lender from you not being able to pay your loan. PMI is a monthly fee rolled into your mortgage payment and is required for all conventional loans that have down payments less than 20%.
For conventional loans, once you have built up equity of 20% in your home, you can cancel your PMI and remove the expense from your monthly payment. With FHA loans, however, PMI costs stay with the loan for its duration. Once they have reached the 20% equity level,many people change their FHA loan to a more conventional loan. As the buyer, you pay a monthly premium and the lender is the beneficiary.
PMI costs vary based on your loan-to-value ratio, the amount you owe on your mortgage compared to its value, and your credit score. The better your credit score, the better the rate you are going to get on your private mortgage insurance. You can expect to pay between $30 to $70 per month for every $100,000 you borrow.
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People purchase private mortgage insurance because, even though it is an extra cost, it enables them to buy a home much sooner.
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If your credit score was 800, you could expect to pay $68 a month on a $200,000 loan. If your credit score was 625, meanwhile, you’d pay $268 per month for your private mortgage insurance.
The average down payment last year, according to the National Association of Realtors, was about 10%. For first-time homebuyers, the average down payment was 5%. This means that a lot of people are paying private mortgage insurance.
Why though? While it is an extra cost, it enables you to buy a home much sooner. If homes are appreciating at a certain rate, the sooner you can buy, the better off you are. This helps compensate for the sting of private mortgage insurance.
If you have any additional questions or are interested in buying or selling, please feel free to contact me. I look forward to speaking with you soon.
