Private Mortgage Insurance (PMI) Explained

According to conventional wisdom, a 20% down payment is required when buying a home. However, as with most financial matters, the truth is more nuanced.

Did you know that putting down 20% of the home’s value can not only lead to a lower interest rate, but also decrease your monthly payments? Not to mention, it can make you a more desirable candidate to sellers, mortgage lenders, and real estate agents. However, we understand that for many home buyers, especially first-timers, coming up with such a large sum can be a daunting task.

In order to make the home market more accessible to a wider range of buyers, both private lenders and government programs provide various options, such as private mortgage insurance (PMI), which is often misunderstood. Here are two important things to note:

  • PMI is a safeguard for lenders in case you are unable to repay your loan. It is mandatory for all government-backed FHA and USDA loans, as well as most conventional loans where your down payment is less than 20%. The exact cost of PMI depends on the type of loan, but it typically falls between 0.5% to 1.5% of the total loan amount per year. For instance, if you have a $150,000 loan with an annual PMI rate of 1.0%, your yearly PMI expense would be $1,500, or $125 per month in addition to your regular mortgage payments.
  • PMI is calculated annually based on the mortgage loan amount, not the value or purchase price of the home. As you make payments toward your mortgage, your PMI rates will decrease accordingly.

The majority of individuals are hesitant to increase their monthly mortgage expenses. However, for numerous potential homeowners, opting for monthly PMI payments in place of a larger down payment is a wise financial choice.

According to the National Association of Realtors reveals that a significant portion of home buyers, 52%, choose to put down less than 20% of the purchase price in non-cash transactions. This trend is even more pronounced among first-time home buyers, with a staggering 74% opting for a down payment of less than 20%. It is no surprise, as saving enough for a 20% down payment can be a challenging feat, especially in today’s competitive housing market. Consequently, many potential homeowners are forced to postpone their purchase until they have accumulated enough funds for the ideal down payment. However, this delay often comes at a cost, as home prices continue to rise, making it more difficult to save enough, and valuable time is lost paying rent instead of building equity.

Is it better to pay for PMI or save for a 20% down payment? The answer depends on various factors. Your USA Mortgage local lender can guide you through the details and assist you in making the best decision for your individual situation, as well as finding the perfect mortgage loan.

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