How To Get Rid Of PMI
PMI is short for “Private Mortgage Insurance”, it can also go by MMI, or, “Monthly Mortgage Insurance”. This is a fee imposed on the borrower by the lender when the borrower purchases a home with less than 20% down. It’s basically a layer of protection for the lender in case the borrower defaults on the loan. So far PMI does not sound like a good idea, but if you’re a buyer in today’s economy, it’s much easier to save $20,000 for a down payment than it is to save $80,000. PMI allows you to do just that.
How Much Does PMI Cost?
PMI depends on a number of variables. The loan amount, the loan type being used, credit score, and the down payment. The more you put down and the better credit you have has the affect of lowering the overall PMI fee. The average annual PMI charge ranges from 0.55% to as high as 2.25% of the original loan amount per year. Below is an example comparing the payment between a version of yourself that outs 20% to one that puts only 5%.
Example 2 (With PMI and 5% Down Payment)
House Cost: $400,000
Down Payment: $20,000 (5% Down Payment)
Interest Rate: 4%
PMI Cost: $333 (1% of Purchase price over 12 months)
Monthly Payment: $2181.18 (Principal, Interest, and PMI)
Example 1 (No PMI with mandatory 20% Down Payment)
House Cost: $400,000
Down Payment: $80,000 (20% of cost)
Interest Rate: 4%
Monthly Payment: $1527.73 (Principal and Interest)
Should You Avoid PMI?
Whether or not to avoid PMI is dependent on your personal situation. If you have the means to put 20% down on a home with no other plans for that money, than we say go for it. If you find yourself struggling to save that much and find it easier to save 5% or even 3.5% for a down payment, than we say that’s the way to go. Our point of view is that getting in the game is better than waiting. Here is an example of what can happen if you wait to save on a home worth $300,000 today, versus buying now while you have the opportunity to do so. You have 5% down now and you wait 5 years to save up the remaining 15% because that’s how long it will take you.
According to Neighborhood Scout, the average annual increase in value for the state of California is 3.7% since Q1 of 2019. Using this number I calculated how much a home worth $300,000 would increase in value over the next five years.
Buying Now
Purchase Price: $300,000
Down Payment: $15,000 (5% of purchase price)
Loan Amount: $285,000
PMI: $250 (1% of purchase price over 12 months)
Interest Rate 4%
Monthly Payment: $1,645.63 (Principal+Interest+PMI)
Value After 5 Years: $346,925.51
Total Spent in PMI: $15,000
Value Of Property Over Time
In the table above, you can see that the home increases in value over 15% in five years! In this time, you will have gained over $45,000 in equity and at the end of the 4th year, you will have enough equity to possibly get rid of PMI. Yes, you read that correctly, if you are paying PMI and you reach 20-22% equity, you can submit a letter to the lender stating that you would like to remove PMI, effectively saving you $250 per month for the remainder of the life of the loan.
Had you waited 5 Years to buy this same house, your down payment will have been $69,385.10, almost $10,000 more if you had had enough 5 years earlier. In addition, you will have been paying rent throughout the 5 years which means, you effectively lost $1,500 per month for 5 years, that’s another $90,000 given to the land lord.
I don’t know about you but I’d rather be paying into my own piggy bank rather than someone else’s.
Conclusion
We stated earlier that the decision to save up for a 20% down payment is a safe, secure way to go with it’s own benefits. So is buying a home now with less down and paying PMI. We know it’s never a great feeling to part with your hard earned money but if you can benefit from a small sacrifice to reap a larger reward, that sounds like a no brainer.
You’re not stuck with PMI forever, it goes away. Even with an FHA loan that “requires” it for the life of the loan, you can simply refinance into a different loan program after you’ve built a sufficient amount of equity.
So ask us how we can help you buy a home today. Trust us, after 5 years, you will be glad you did.