September 13, 2019

Pricing Out PMI

How often do homeowners actually put 20% down? The National Association of Realtors reports that in 2018, the median down payment was 13% for all buyers and 7% for first-time buyers.

Despite the data, many people still have a false perception of how much they need for a down payment – or they're dissuaded once they hear the term "PMI" or "private mortgage insurance."

Fear not! We're here to explain what PMI is and how it can be to your benefit.

What is PMI?

PMI is an added insurance policy for homeowners who put less than a 20% down payment and is designed to protect the lender if you are unable to pay your mortgage.

PMI is not the same thing as homeowner's insurance. PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage. It's a monthly fee, rolled into your mortgage payment, that is required if you make a down payment less than 20%. While PMI is an initial added cost, it enables you to buy now and begin building equity versus waiting five to 10 years to build enough savings for a 20% down payment.

The cost of PMI varies based on your loan-to-value ratio, which is the amount you owe on your mortgage compared to your home's appraised value. While the amount can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed. For more specific data on PMI, use our  calculator.

PMI Isn't Forever.

Once you've built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment. If you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home.

PMI can be a Good Thing

While you'll be paying extra each month in PMI for a loan with a down payment of less than 20%, you'll still be able to take advantage of the 30-year fixed-rate mortgage. A fixed-rate mortgage offers you security and peace of mind, plus with today's low rates you'll lock in a great deal throughout the life of the loan.

Why it Matters to You

Lower down payments help expand homeownership opportunities for all types of buyers. There are a multitude of low down payment mortgage programs available qualified borrowers —and not just first-time homebuyers. Options like Freddie Mac's Home Possible® mortgage allow qualified borrowers to put down as little as 3%.

It's also a great time to buy with today's low rates. Know that there are a variety of different mortgage options available, so be sure to carefully evaluate your finances and talk with your lender or a trusted housing professional to determine the best options for you.

For more information and tools on buying a home, visit my Home by Freddie Mac®.

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