According to Freddie Mac, private mortgage insurance is defined as, “An insurance policy that protects the lender if you are unable to pay you mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%. Once you’ve built equity of 20% in your home, you can cancel your private mortgage insurance and remove that expense from your mortgage payment.”
In your position as the borrower, you are responsible for paying the premiums for the insurance policy itself every month. On the other hand, the lender is who serves as the beneficiary. Freddie Mac explains the process further by stating the following:
“The cost of private mortgage insurance varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.”
The National Association of Realtors have released statistics stating that last year, the average overall down payment for all buyers totaled 13%. In terms of first-time buyers, that total decreased to only 7%, and for repeat buyers, they found themselves putting down a total of 16%. All in all, this shows that even though there was a large number of buyers last year, private mortgage insurance never stopped them from doing everything that they could in order to purchase their dream homes.
To get a better look of how much a mortgage would cost on a $200,000 home with both private mortgage insurance and a 5% down payment as opposed to a 20% down payment without private mortgage insurance, here are some further statistics:
- 5% Down Payment & Private Mortgage Insurance: $10,000 (down payment), $190,000 (loan amount), 30-year fixed rate (mortgage type), 4.1% (interest rate), $918.08 (mortgage payment), $104.50 (private mortgage insurance), $1,022.58 (total amount)
- 20% Down Payment & No Private Mortgage Insurance: $40,000 (down payment), $160,000 (loan amount), 30-year fixed rate (mortgage type), 4.1% (interest rate), $773.12 (mortgage payment), $0 (private mortgage insurance), $773.12 (total amount)
All in all, the more of a down payment you make, the lower of an amount that you will have to pay in terms of a monthly housing cost. Freddie Mac, however, urges you to keep the following in mind:
“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”
The overall bottom line is, in the event that you ever have any questions in regards to whether you should purchase a home now or wait until you’ve been able to save a larger amount of money for a down payment, consider meeting with an experienced professional in order to discuss what your best option should be. In the long run, this will help you to make a more informed decision for both yourself and your family.
Thank you for reading our real estate and homeowner’s blog. We are Weichert Realtors – Barton Harris & Co. and we’re happy to have helped you learn more about private mortgage insurance.