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Fresh Look Blog

What is Private Mortgage Insurance?

6/21/17 1:27 PM / by BB French

BB French

With the large number of mortgage programs available that allow buyers to purchase a home with a down payment below 20%, you must understand Private Mortgage Insurance (PMI) and how it influences your appreciation, monthly payment, and effects your home ownership goals.

What is 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.”

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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.”

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.”

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:

 

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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 demonstrates a large number of buyers last year, PMI did not stop them from buying their dream homes.

 

Conclusion

When considering if you should continue to rent or buy a house now, PMI is a factor to be considered.  Unfortunately, there is no hard and fast rule if a low down payment program will be the best option or the worst option.  Everything depends on your individual siutation, your families goals, financially and personally.  Read our article, Why Rent When You Can Buy? for a full discussion of the pros & cons.  

 

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, Contact Our office, we'll connect you with a local professional who can explain current market conditions and help you make the best decision for you and your family.



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Topics: Buy

BB French

Written by BB French

BB French is Co-Founder & Designated Broker with the Fresh Look Real Estate team. She entered the real estate industry in 2010 is currently a licensed broker & full time investor. BB focuses on small multi-family properties in north end King County and Snohomish County areas. Her clients are made up of primarily self managing owners, buy and hold investors, and the team at Fresh Look.