Buy now with private mortgage insurance or keep saving?

There are many that believe you need 20% down to buy a home, that is not the case but you will need private mortgage insurance (PMI).  What is PMI? Private mortgage insurance is an insurance policy to protect the lender in case of default. So why should you pay for it? Many hate to pay PMI since it benefits the lender but is paid for by the buyer.

The realty is that by the time most people save up the 20% needed to avoid MI, they could have bought a home, gained equity in that home and possibly had a tax break on their income taxes.  Over the past five years, homes have appreciated every year and are up about 5% over the past year according to the Federal Housing Finance Agency.  

PMI is not a bad thing – it allows you to buy a home with as little as 3% down.  PMI will also go away, you need to pay your mortgage down to 80% of the original mortgage balance to eliminate PMI after two years. After 5 years, you can get an appraisal to show an increase in value to allow you to eliminate mortgage insurance.  You do need to make your payments on time and request to have the PMI removed.  If you do nothing, your PMI will go away once you reach 78% of the original balance.

Consider that if you are buying a $200,000 home, you would need $40,000 to avoid PMI. For most buyers, especially first time homebuyers, that is not realistic.  A first time homebuyer could buy with 3% down and pay mortgage insurance much easier!  If you think about how long it would take you to save $40,000, then remember that home prices are increasing, so now you will need more than $40,000 to buy the same home!  Plus we expect interest rates to increase. All this means that paying PMI is not a bad thing.

For some buyers with lower credit scores, FHA may be the way to go. You will still need mortgage insurance but it may be a lower payment.  PMI is usually cheaper if your credit score is over 720-740.  FHA mortgage insurance will be lower if your score is under 700-720.  FHA mortgage insurance will not go away unless you refinance or sell your home. But depending on how long you plan to be in the home, FHA may be a better option.

Talk to your loan officer, figure out what you can afford and don't be afraid of private mortgage insurance! It's there to help you get into a home sooner and to help protect the lender.

Leslie Vanderwerf,  NMLS ID#335509, American Mortgage & Equity Consultants, Inc, An Equal Housing Lender, NMLS#150953 - Email - Website

Written By

Currently a Senior Loan Officer at Cross Country Mortgage LLC, it's hard to believe I have been in the mortgage business for more than 25 years and have worked with Sharlene since 2000! I love sharing mortgage insights here each week and helping people finance their homes. Listening helps me find the right program for you!

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