PMI (Private Mortgage Insurance)
PMI stands for Private Mortgage Insurance. The purpose of PMI is to protect the lender in the event you fail to make your mortgage payments. PMI can be a requirement if you are putting less than 20% of the purchase price towards a down payment on a conventional loan. You may also see PMI as a requirement if you are refinancing (again, with a conventional loan) and your home equity is less than 20%.
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 Gumbinger, 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.
(An earlier version of this story misstated Keith Gumbinger's name.)