One of the most common misconceptions about purchasing a home is the need for a substantial downpayment. While purchasing a home is not without its upfront costs, including a downpayment, closing costs and moving expenses, the downpayment doesn’t need to be as large as you may think thanks to Private Mortgage Insurance (PMI).
What is PMI?
PMI is a type of mortgage insurance required on conventional loans when the borrower’s down payment is less than 20% of the overall value of their future home. This insurance is put in place to protect the lender if a borrower were to stop making payments on their loan and can be paid on a yearly basis or wrapped into your monthly mortgage payment.
At Town & Country, we're proud to offer some of the lowest rates on PMI! How? It's simple! Credit Unions, by definition, are not-for-profit organizations that exist to serve their members. Insurance providers recognize this status and give us discounted rates that we're able to pass on to our members.
Plus, PMI doesn’t last forever! Once you’ve paid down at least 20% of your home’s original appraised value, you can request your mortgage servicer to remove the PMI. If you lose track of how much you’ve paid towards principal and forget to reach out to your servicer, no worries. They are required to remove the insurance once your home equity reaches 78% loan to value based on the value at the time you originated your loan.
Top Four Benefits of PMI
1. Get into a Home Sooner
Saving up 20% for a downpayment on a home isn’t realistic for most homebuyers. With today’s mortgage programs and PMI, borrowers can get into a home with as little as 3% down, significantly slashing the amount and time needed to save up.
2. Keep Some Savings for the Unexpected
Saving for a home is a huge accomplishment, no matter the number! But dumping all of your hard-earned savings into a downpayment to avoid the cost of PMI isn’t the right answer either. Keeping a portion of your hard-earned cash in a savings vehicle, like a money market, CD or other interest-earning account, ensures you’re prepared for the unexpected and allows you to continue growing your savings, rather than locking it up in your home.
3. Start Building Equity For Yourself
It’s no secret that when you pay rent, your landlord is the one building equity, not you. By leveraging PMI with a lower downpayment, you’ll be able to make the jump from renter to homeowner sooner and start building up equity in your own home. Home equity is the difference between what your home is worth and the amount you owe on your mortgage. As you make monthly payments, your loan balance decreases and your home equity builds.
4. Make Your Home Budget Go Further
If you have already have a good-sized downpayment saved up (in addition to your emergency funds and home repair funds), you can leverage PMI to purchase a more expensive home. Make sure to run the numbers so you know you can still afford the monthly payments, but this could be a good way to get into that home you always dreamed of sooner.
Whether you are well on your way to your savings goal or haven’t even made a dent, there’s never a bad time to talk to a local mortgage lender if you’re interested in owning your own home. In a judgement free zone, they’ll analyze your financial situation and help you create a plan to make owning a home of your very own the next thing you check off your bucket list. Schedule a free consultation today to get started!
For qualified buyers. Rates and loan approval are dependent on credit and underwriting factors and may be subject to additional eligibility criteria. Rates, terms and conditions are subject to change without notice. Contact us for more details.