Everything You Need to Know About PMI as a First-time Homebuyer
If you will take out a mortgage as a first-time homebuyer, lenders want to make sure that you’re able to dutifully repay the whole amount of the loan you’ll take, plus interest, until the end of the term. Because lenders take a considerable risk when lending money, they find it ideal to require borrowers to make an upfront down payment of 20 percent. If you think a 20 percent down payment is overwhelming, lenders may allow you to put a low down payment, but they will require you to pay a Private Mortgage Insurance or PMI. This could be a viable option if you want to fulfill your homeownership dreams.
Why consider taking out a mortgage with a PMI?
You probably have an idea by now that you need a private mortgage insurance coverage if you will take out a conventional mortgage with a low down payment. If you have good credit, a good way to avoid PMI is to put at least 20 percent down. However, depending on what state you live in, it may take you decades to save for a 20 percent down payment as a young homebuyer with an average income and a less appealing credit score. Unless you qualify for a VA loan, taking a second mortgage or piggyback mortgage is another way to avoid PMI.
The national median listed home price is now pegged at $289,000 according to Zillow so it means you need to save at least $57,800 if you want to satisfy the ideal upfront down payment that most conventional lenders require. Aside from the down payment, you also need to prepare for closing costs that could go around 2 to 5 percent of the property’s purchase price which could make homebuying even more overwhelming.
Many homebuyers find it ideal to make a low down payment. In fact, in a 2017 survey of the National Association of Realtors revealed that 61 percent of first-time homebuyers put less than 20 percent for a down payment. Even if you have an impressive credit history, you may find it ideal to put a low down payment if you want some of your funds to cover closing and other upfront costs associated with buying a home. Putting a low down payment is also worth considering if you need renovation funds as you move into your new home.
It’s possible to remove PMI in conventional loans
Because it is an additional cost on top of your monthly mortgage, it’s important to know that you can remove private mortgage insurance when you take out a conventional loan. Unlike an FHA loan where you need to pay the mortgage insurance premium or MIP all throughout your mortgage term, you can stop paying PMI. Under certain circumstances, the Homeowners Protection Act (HPA) gives you the right to remove PMI in your conventional loan.
You may want to request your mortgage servicer in writing to cancel your PMI if you’ve accumulated at least 20 percent equity on your home, meaning, your mortgage principal balance is reduced to 80 percent or less. Your lender may cancel your PMI if you’re current with your monthly payments and you’ve proved that you don’t have any junior liens like a second mortgage on your home. Some lenders, on the other hand, may also require an appraisal to determine if the value of your home has not declined. If you maintained a good payment history, your servicer may automatically cancel your PMI.
Factors that determine the cost of your PMI
The amount of your down payment, your credit score, and policy rate typically determine your PMI cost. For every $100,000 you’ve borrowed, your monthly PMI could go around $30 to $70, according to Zillow. Typically, your PMI is reduced if you put a higher down payment or you have an impressive credit score. PMI payment method either depends on a lender or a loan policy you’ve applied for. To help you determine the approximate PMI your lender may require, you may want to use an online PMI calculator.
PMI gives you an opportunity to become a homeowner
PMI is an insurance for lenders to recover their losses if borrowers can no longer repay their monthly mortgage. If you’re a homebuyer who wants to put a low down payment, lenders will require you to have PMI to reduce their risk in an event that you default on your mortgage. Having a PMI could help you qualify for a low mortgage interest rate.