In today’s dynamic housing market, knowing the pros and cons of Private Mortgage Insurance (PMI) can help you make the right decisions if you are a homeowner paying PMI. Higher home values today mean homeowners with PMI may want to consider refinancing your home to see if they can remove this additional cost from their home loan.
What is PMI?
PMI has helped increase home affordability for many Americans over the years. It is intended as a helpful tool for homebuyers who do not have the required 20% down payment of the home’s value. It works by insuring the loan for mortgage lenders in case the homeowner defaults on the loan.
PMI costs typically ranges from 0.5% to 1.5% of the loan amount per year (divided by 12) and becomes part of the mortgage payment.
The benefits of PMI are that it helps overcome the biggest hurdles to homeownership, which are housing affordability and inventory. PMI allows more people to buy homes now in a hot, higher-priced market, rather than waiting. But it comes with a price.
For example, the cost of PMI alone on a $650,000, 30-year home loan with a $100,000 down payment (which is 15.4% of the home’s value) and a 0.5% mortgage insurance rate is $229 a month. The total cost of PMI until you reach 20% equity in the home would be $8,837*.
The cons to PMI are that it remains with a mortgage until the principal balance falls to 80% below the value of the home. It may take years to reach this threshold and, until then, you’ll continue to pay it. Additionally, for those who narrowly qualify for the mortgage, the additional PMI monthly payment can compromise your ability to qualify for the loan.
How to Remove PMI
In today’s housing market, however, there is an opportunity for current homeowners to eliminate PMI on their mortgage by refinancing their loan. The low inventory and high housing prices mean that your property may have a higher appraised value today. Combined with paying down your loan, you could potentially have the 20% equity you need to refinance your loan without the need for PMI.
This could save you hundreds of dollars a month that could be used to pay down more of your home loan principle each month or used for other things. Of course, every situation is different.
You’ll need to crunch the numbers yourself to see if removing PMI on your loan is worth the refinancing costs.
If you’re a first-time homebuyer, you’ll need to consider whether a smaller down payment with PMI is worth purchasing a home today, rather than waiting until you have the 20% down payment. Calculate what your mortgage payment will be with and without PMI to see your options.
Travis Can Help
Travis Credit Union can help you navigate the world of mortgages and explain the benefits of Private Mortgage Insurance. Our online Real Estate calculators let you know what loans work best for your unique situation. As one of the best mortgage lenders for first time buyers in this area, Travis also offers free Financial Webinars on topics such as Understanding the Importance of a Good Credit Score and Home Buying 101.
When you’re ready to buy your first home or refinance your existing home loan, we’re here to help. Our knowledgeable and professional mortgage loan consultants will review your information and recommend the best loan product to fit your needs. Let us know when to reach out to you to get your home loan process started.
Visit us at traviscu.org for more information or call us at 888-698-0000.