Private mortgage insurance — what it is and how to avoid it
Times have changed. While most banks generally do require a down payment of buyers, the once standard 20 percent isn’t so standard these days. However, there is still substantial appeal to putting 20 percent down on a home.
Not only will monthly house payments be less because the buyer putting 20 percent down isn’t financing as much, there’s another item to consider – private mortgage insurance (PMI). Those buyers that put down less than 20 percent will be required to pay a monthly PMI premium until they have equity in the home that is equal to at least 20 percent of the amount of money financed.
In other words, those who put down 20 percent won’t have to add a PMI premium to their monthly mortgage payments, whereas those who put down less than 20 percent will. How much, though, will that PMI premium cost?
Pinning that down exactly can be a chore, but a good rule of thumb is $55 per month per $100,000 financed. A buyer who finances exactly $100,000 after putting down some form of down payment is looking at an extra $660 per year in mortgage payments due to the PMI premium.
Go up to a $150,000 home – typical in Arkansas – and the buyer is looking at an additional $82.50 per month or $990 per year. Those payments can add up in a hurry. That PMI premium might be on a mortgage for a long time, too. Under a typical, 30-year mortgage, the bulk of early payments cover interest and principal balances are retired as the years pass. In other words, building up enough equity to hit that “20 percent mark” where lenders start to drop PMI premiums can take longer than you might think.
But, what is PMI? It protects the lender – to an extent – should the buyer default on the loan. It does not pay the entire amount due under the mortgage, so the buyer believing the insurance will excuse him or her of all liability in the event of a default is in for a surprise.
PMI, rather, is meant to cover the lender’s losses in case the buyer defaults and generally pays – you guessed it – the difference between what the borrower has already paid on a mortgage and 20 percent of the amount borrowed. In other words, the borrower is still responsible for 80 percent of the purchase price in the event of a default – PMI won’t help with that.
Still, PMI came about as a way to allow people who can’t put down 20 percent of the purchase price of a home to still take out a mortgage. Look at it this way – the down payment on a $150,000 home would be around $30,000 and that’s not pocket change. In that regard, it’s helped a lot of people become homeowners who might have trouble coming up with a large down payment.
Still, those who want to bring those mortgage payments down as low as possible might want to consider how much they can save if they are able to put up enough up-front money to avoid PMI. It’s something to think about, at least, and how PMI can increase mortgage payments is certainly an item of information buyers need to know when considering taking out a loan and buying a house.
Column written and distributed to Arkansas publications on behalf of the Mortgage Bankers Association of Arkansas.
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.