What Is PMI? Everything You Need to Know About the Hidden Cost Hitting 52% of Millennial Home Buyers, By KEVIN MAX September 19, 2019
Buying your first home isn’t easy. And for many millennials it may cost more than they think.
One recent survey of millennial home buyers found more than half end up paying an extra fee known as private mortgage insurance, on top of their regular mortgage payments. While the extra payments can help you get into your first home quicker, it’s easy to get caught by surprise.
“Going in most first-time home buyers don’t know about private mortgage insurance,” says Bill Banfield, executive vice president of capital markets for Quicken Loans.
Home buyers are typically on the hook for private mortgage insurance, or PMI, when they buy a house with less than 20% down. It’s not insurance for you, the homeowner, but for your lender in case you default on your mortgage.
A new survey of 1,000 of homeowners between the ages of 23 and 38 by online marketplace LendEDU found 52% ended up on the hook for PMI.
PMI, typically amounting to 0.2% to 2.0% of the mortgage amount, can be costly.
For example, the average price of the Millennial starter home in 2018 was $238,000, according to data from Realtor.com. If the new buyers’ down payment was 10% or $23,800 and their 30-year mortgage $214,200, PMI can range from $73 monthly to as much as $400 depending on the buyers’ credit score, the loan-to-value and debt-to-income ratios.
The nice thing is that PMI doesn’t last the duration of the loan and there are ways to get out of it. Here’s how to reduce or ditch PMI.
Get to 20% down payment
The most obvious way to avert PMI from the beginning is to wait until you have that 20% down payment. But this could take years, and the rising value of houses in that market could keep potential buyers frustrated chasing the growing down payment.
A relative can also make a gift for the balance to bring your down payment to 20%. There are some restrictions, but generally, if a buyer has a letter with these details, it will pass muster with the lender’s underwriters.
Get to 22% Equity
When a buyer’s equity has reached 22% of the home’s original appraised value, the loan servicer is required to drop PMI. In many cases, however, homeowners can petition their lenders to drop PMI when they have built up 20% equity in the house. Keep in mind that lenders won’t consider removing PMI until after about a two-year “seasoning period,” according to Keith Gumberling, vice president of HSH.com, a mortgage information resource, “They could still deny your request,” he notes.
Monitor Your Property Appreciation
Another way is to track your property appreciation. If your home jumps in appraised value, your equity in the home will increase. If that bump gets you over the 20% equity threshold, you can ask your lender to end PMI.
Don’t Go it Alone
Add a significant other with another source of income to your loan. “Something new, we’ve seen recently is that PMI is lower with two incomes on the loan than with a single borrower,” Gumbinger says.
Know the PMI Increments
What most first-time buyers don’t consider is that PMI rates are applied in increments. So don’t automatically assume that putting down more money will reduce your PMI. It may make more sense to hold on to those additional funds for closing costs or an emergency fund.
Here is a handy calculator to decide whether or not to bump up your down payment.
Ultimately, uncovering the hidden cost of PMI will help you plan for its timely demise.
Comments below are by Mahesh Varma, KW Realty licensed agent in CA. (DRE# 01932465)
This is my opinion about this article and PMI:
This is a well written and informative article.
Banks are merciless when it comes to removing PMI. I have experienced this with my own loan. I think PMI is a waste of money. Yes you might be able to get yourself into a home. But banks are not going to tell you when to stop paying.
Rather save your money, to get to your 20% or 22% down payment, then buy a house 🙂
You the home buyer, for the most part will have to monitor this PMI payments yourself. Then when it’s time, you have to deal with the different representative’s at the bank. At times, for me, it felt like begging, to get them to remove the PMI insurance.
Some banks will tell you that there is no PMI charge, but they will build it into the loan.
Here’s the link to very useful calculators. If you need help, please call me. I’ll be happy to help you figure this out.
I can be reached at 562.818.7174, or [email protected]
Here’s the link to the original article as it appeared in Money.com