Every year, tens of thousands of homebuyers are helped by private mortgage insurance (PMI). Without PMI, many of those folks would not have been able to move forward with their home purchases because of their insufficient funds for a down payment. Private mortgage insurance allows buyers to bridge this gap and purchase a home sooner with less money upfront.
U.S. Mortgage Insurers (USMI) publishes data that shows how many borrowers have benefited from having private mortgage insurance. In California, 103,120 homebuyers and homeowners benefited from PMI during 2019.
But What Is PMI?
Private mortgage insurance is a policy that protects lenders from losses that could result from borrowers’ default. Typically, PMI is required when a borrower’s loan-to-value ratio rises above 80%, which means a down payment below 20%.
You might be wondering what the benefits of private mortgage insurance are for a homebuyer. After all, it is an additional expense increasing monthly mortgage payments. But without PMI, the average homebuyer would be required to put a lot more down upfront, therefore making the borrower wait longer to purchase a property.
Smaller Down Payment; Shorter Path to Homeownership
Private mortgage insurance allows first-time homebuyers to take out a mortgage with as low as 3% down. First-time homebuyers are defined as buyers who have not owned a home in the last 3 years. Non-first-time homebuyers can purchase with down payments as low as 5% depending on the loan product. Without PMI, larger down payments would be necessary for most homebuyers — up to 20% in many cases. That would exclude many people from homeownership, particularly in high-cost areas such as the Bay Area.
A study conducted by USMI found that it would take a homebuyer in California nearly 40 years to save up a 20% down payment for the average priced home. However, the protections added by mortgage insurance allow typical buyers to put less down and therefore purchase sooner.
Canceling PMI When You Have Sufficient Equity
As noted above, private mortgage insurance in California is generally necessary for home loans with a loan-to-value ratio higher than 80%. Over time, however, borrowers typically can lower their LTV ratio with their regular monthly mortgage payments.
Once the LTV falls below 80% (and the home’s equity reaches 20%), homeowners are typically able to cancel their PMI policies.
Government vs. Private Mortgage Insurance
The above information pertains to conventional mortgage loans in particular, meaning home loans not guaranteed by the government.
However, some government-insured programs call for mortgage insurance. Homebuyers are required to have this kind of insurance in place for FHA loans. Usually, the mortgage insurance designated for FHA-backed mortgages cannot be canceled until the loan is paid off (or refinanced into a conventional loan). On the other hand, PMI can usually be canceled once a certain LTV threshold has been reached.
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