Mortgage Insurance and The 20% Down Debate
20% DOWN! I HAVE TO HAVE A 20% DOWN PAYMENT TO BUY A HOUSE! HOW AM I EVER GOING TO BE ABLE TO BECOME A HOMEOWNER?!
Sound familiar? Sound like something you’ve had running through your head before?
If so, you’ve been lied to. Or, at least, you haven’t been completely told the truth.
Many people begin thinking about their first home purchase with this exact thought in their head. A 20% down payment is certainly a good down payment, if you have the funds available. But why is it that so many people think that it’s an absolutely prerequisite to being able to purchase property?
It’s probably not a blatant misdirection on anyone’s part, it’s likely just a case of missing information or confusion, with the culprit being...Mortgage Insurance.
What is Mortgage Insurance? Well, in short, it’s what a buyer has to pay along with their monthly mortgage payment, if they purchased a property with LESS than 20% down.
So that’s probably where that fixation on the 20% down figure stems from. And it’s not without legitimacy. Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP) are essentially the same thing, they just apply to different types of loans. PMI applies to conventional loans for purchases made with less than 20% down. MIP applies to FHA loans, which are typically made with the minimum 3.5% down.
Now, the question remains, what benefit does a buyer get from this insurance? And the answer is: nothing and also A LOT. The insurance is essentially for the benefit of the lender, and is meant to off-set the loss in the case of a default by the buyer. While this may seem unfair at first glance, consider the fact that home ownership would be out of reach for many, MANY people, if there was not a way to purchase with less than 20% down.
The cost of mortgage insurance varies depending on the price of the property in question and the specific loan or lending situation. It would be best to discuss the cost with a lender, when you are considering getting into the market.
Lastly, a home owner can have PMI and MIP removed from their monthly payments, once a property’s value has increase beyond 80% loan-to-value. With a conventional mortgage, an appraisal would need to be submitted to the lender, whereas an FHA borrower may need to actually refinance the property. The regulations surrounding this and mortgage insurance in general are constantly changing, so make sure to talk with your lender about any specifics.
If you need a referral to a great lender, we would be happy to provide some contacts!