PMI: The Cost of Buying a Home with a Low Down Payment
PMI or Private Mortgage Insurance is a widely accepted add-on to buying a home with a low down payment. This insurance is designed to protect the bank from default on the loan you just purchased to buy the house of your dreams. Like all insurance products, the hope is that it will never be needed. But in the case of PMI, it might very well be the insurance you can never get eliminate.
What is PMI?
It is insurance but does not insure the borrower. That is a different type of product called mortgage life insurance. This type of insurance does provide protection if the borrower does pass away, and is usually purchased for the payoff amount of the mortgage at the time of the loan. In this case, the insurer offers a policy against the house value. It is often unnecessary if the borrower has life insurance, which is often a much cheaper option.
PMI on the other hand, insures the lender from default. It is only added to the loan if the borrower puts less than 20% down on the property. In this case, the lender assumes that the borrower may not be able to make payments on the loan should they run into a financial bump in the road. It only insures the shortfall in the down payment.
How does PMI work?
If you have ever wondered how banks/lenders arrived at 20% as the down payment sweet spot, there is a good reason. Banks/lenders have determined that a foreclosed house is worth 80% of the purchase price, so they require the borrower to put 20% down. If the amount is less, the insurer insures the difference between the required down payment and the amount actually placed down on the loan.
How is PMI calculated?
The problem with PMI is perception. Most people think little about the added cost, as long as it helps facilitate the purchase of the house. But the cost can be high and even if you aren’t a math geek, here’s what it will cost you in basic terms.
PMI is usually calculated on a monthly basis and is often forgotten about once the mortgage payments enters in the regular budget. In the simplest explanation possible, here’s the equation, with assumptions.
Assume first that your PMI is listed at closing as 0.67%. Assume you are signing for a mortgage on a $300,000 home. Assume you only put down 5%. This means you have placed only $15,000 of your own money down leaving you a financed balance of $285,000.
The calculation: The remaining balance of $285,000 x 0.67% = $1909.50 per year, or $159.13 per month – in addition to the mortgage payment.
How to get out of the PMI
This relies on two things: One, you satisfy the mortgage down to the original requirement of 20%, which could take as long as five years and cost you an estimated $9500 in payments to the insurer, or two, the cost of you house rises substantially essentially creating enough equity to cover your down payment shortfall. In the latter case, you will need hire an appraiser to reevaluate the property’s worth compared to similar homes in the area.
One upside: The lender may be willing to forgive the PMI when the loan value hits the 78% mark.
How can we assist you today?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
Karen Marcy, Broker/Realtor
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
Mobile: 541-420- 3725 | Mobile: 541-420- 4018 | Mobile: 503-327- 9611 | Fax: 541-593- 5123
Licensed in Oregon