Should You or Shouldn’t You Avoid PMI

Should You or Shouldn’t You Avoid PMI?

How to Get the Best Mortgage Series – Week 8

Follow this series to learn how to get the best mortgage for your specific financial situation and goals. You’ll see what steps you need to take throughout this process to make it productive and successful.

This week you’ll learn all about Private Mortgage Insurance (PMI) and ways you can reduce or avoid this cost on your mortgage. However, having PMI can be a good thing for YOU and I’ll tell you why.

Do you worry about PMI payments since you’re not able to put 20% down on your new home?

You’re not alone!  Many buyers don’t have cash for a large down payment, especially first timers or if you are buying and selling a home at a the same time.  Without 20% down,  private mortgage insurance (PMI) is how you buy a home.  

But, PMI has gotten a bad rap, maybe unnecessarily.  Here’s the scoop on how to think about PMI and some things to think about to decide whether you should avoid it or use it to help you get into your new home! 

A PMI Recap

If you can’t come up with a 20% down payment for a conventional loan, you will be required to pay PMI. You can pay it within your monthly mortgage payment, as a one time fee at closing, or you could roll the cost of the PMI into your interest rate with a lender paid option.

This insurance protects the lender in case you default on your loan. There is more risk in lending 80% or more of the cost of the home to you and lenders want to protect their money too!

The cost of the mortgage insurance depends on the percentage you put down, your credit score, your loan amount, and your debt to income ratio. Any one of those items can change the cost of the PMI, and I can help you understand which is the most cost effective way to pay the PMI based on how long you intend to own the home.

PMI can be cancelled once you accumulate 22% equity in your home for conventional loans, but the mortgage insurance on FHA loans require it until the loan is paid in full.

Why the Confusion?

Should you or shouldn’t you avoid PMI? This is a common question many buyers tackle … and get confused about!

You’re probably wondering if PMI is as bad as some friends say OR is it just “a fact of life” when buying a home that others may say.

I’m here to help you figure out what is best for YOUR specific situation.

There can be pros (yes, there are some!) and cons to being required to take out PMI.

Ways to Save on PMI

For moderate income buyers:  There are programs that allow for low down-payment options with a reduced mortgage insurance cost. I can help you determine if this is something you are eligible for based on the location you are searching in.

For buyers using a bond loan such as the Maryland Mortgage Program or DC Open Doors: If you are below the moderate income limit for the area you are purchasing in, you may qualify for an even further reduced PMI payment.

Be sure that you work with a loan officer that will show you the ways that you can pay the PMI and provide the break even on costs between the options you have. I can help you with this!

Avoiding PMI

• One option is called a piggy-back mortgage such as a 80/10/10 – where you put down 10% of the value of the home but take out two mortgages, one 80% of the total value and the other 10% of the value. This smaller piggy-back loan can be a HELOC, or have balloon provisions, and is usually riskier than a 30-year fixed loan.

• Another piggy-back loan option is 80/15/5 – where the buyer puts 5% down and then takes out two loans, one for 80% and the other for 15% of the value. Works basically the same way as an 80/10/10 but with smaller down payment.

Why I like PMI

Paying PMI means you can buy your home now and not delay homeownership. It actually may cost you less than you think in the long term. Why?

It could take years to save up for a larger down payment, which means more years of renting and not investing your money in a home that you own. You’re “wasting” money on rent that goes toward nothing, kind of like PMI. So what’s worse to you?

Once you save up for a larger down payment, you may face higher home prices and perhaps higher interest rates, costing you more in the long run than if you paid PMI with a home bought earlier. If interest rates are low, you might not want to delay and get into a home despite the PMI payment since the lower interest rate will cancel out this additional monthly cost, especially if you live in your home for a longer time.

Paying PMI could be worthwhile if it allows you to buy a home in a thriving housing market rather than delaying for a more uncertain market. You will benefit from the rising home prices since you’ll get to 22% equity sooner as the value of your home will increase. That means you may be able to cancel your PMI early!

It’s not wise for any buyer to put all of his/her savings into a down payment. That’s when paying PMI may be worth it so you won’t wipe out your savings trying for the 20% down.

Having PMI means you’ll get used to budgeting for this payment each month and once it’s cancelled, you could use that money toward paying down the principal balance on the loan or toward other investments. That’s always a good thing!

There are good reasons to avoid PMI. On the other hand, it might make more sense to pay PMI if it gets your foot in the “homeownership” door sooner.

So, don’t talk yourself out of a home if you don’t have 20% down. PMI is not all bad and can be a way to get you into your new home sooner than waiting to save. Email me at jeng@firsthome.com if you would like to learn more about your options with less than 20% down.