Unlock Savings: Mortgage Insurance Costs Are Dropping! Find Out How!

When it comes to private mortgage insurance (PMI), the prevailing notion has been to steer clear. It’s a requirement for those taking out a conventional mortgage with less than a 20 percent down payment, and for many first-time homebuyers, it feels like an added burden during an already costly journey.

However, there’s been a shift in the landscape. Private mortgage insurers have slashed their rates, making PMI less of a dreaded term and more of an opportunity.

“I’m a big advocate for mortgage insurance — and yes, it’s often seen as a dirty word,” remarks a senior vice president from a leading mortgage company. “Yet, if you consider the actual cost of PMI against the ability to put down just 3 or 5 percent, the benefits are clear. That extra cash could be working hard for you elsewhere.”

What is Private Mortgage Insurance (PMI)?

PMI is essentially a safety net for lenders when borrowers make a down payment of less than 20 percent on a home. While it might feel like an additional expense, PMI is designed to protect the lender in case of default, not you. Essentially, if you stop making payments, the lender gets a payout from the PMI provider.

The good news? PMI is a temporary expense. Legally, lenders must cancel it once your mortgage balance hits 78 percent of your home’s original purchase price, or at the halfway mark of your loan term — whichever comes first.

But wait! You don’t have to wait until then. If you manage to pay down your balance to 80 percent, you can petition your lender to remove PMI, although you’ll need to cover an appraisal or broker price opinion to confirm your home’s value.

In the past, homebuyers have gone to great lengths to dodge PMI, including taking out piggyback loans. This strategy involves making a 10 percent down payment and securing a second mortgage for the remaining 10 percent. While this approach avoids PMI, it can also lead to added closing costs and a higher mortgage rate.

Are PMI Costs Dropping?

Here’s the scoop: the average cost of PMI is about 0.4 percent of your loan amount. For instance, on a $400,000 mortgage, you’d be looking at a PMI premium of $1,600 annually, translating to roughly $133 a month.

Just a few years back, in 2019, borrowers were facing rates closer to 0.5 percent, which would have put them at $2,000 a year, or about $167 monthly. But remember, these are just averages. Your actual PMI cost will hinge on a variety of personal factors, like your credit score and debt-to-income ratio, as well as the state of your local housing market.

A recent study showed remarkable variability in PMI costs. For those putting down just 3 percent with a credit score below 680, PMI could run over 1 percent annually. Conversely, a borrower with a 3 percent down payment and a credit score over 760 might pay less than 0.5 percent.

Why Are PMI Rates Declining?

The private mortgage insurance sector comprises a handful of key players who have refined their pricing strategies over the last decade to better reflect the unique risks of individual borrowers.

“A decade ago, lenders relied on rigid rate cards. Now, there’s a dynamic pricing process that considers a multitude of factors,” explains a senior director at a prominent ratings agency.

This more tailored approach allows PMI providers to align premiums more closely with the borrower’s risk profile, leading to more accurate and often lower costs.

Is Paying PMI Worth It?

With home prices soaring, coming up with a 20 percent down payment can feel like climbing a mountain for many, especially first-time buyers.

If you have the flexibility to choose between a larger down payment and a smaller one, it’s worth asking yourself: “What could I do with that extra cash? Would I rather invest it elsewhere?”

Let’s consider two scenarios for a buyer looking at a $500,000 home:

• Option 1: A 20 percent down payment of $100,000. At a 30-year mortgage with a 7 percent interest rate, your monthly payment would be $2,661.
• Option 2: A 10 percent down payment of $50,000. Your loan amount would increase to $450,000, leading to a monthly payment of $2,994. Adding a PMI premium of 0.35 percent would mean an additional $131 per month, bringing your total to $3,125.

There’s no one-size-fits-all answer here. Keeping that extra $50,000 for emergencies or investments costs you $464 a month — the difference between the two scenarios. Ultimately, it’s about how much you value having that liquidity.

Final Thoughts

While PMI can be seen as an additional expense, it’s clear that with falling rates, buyers no longer need to shy away from it. Instead, it could be a stepping stone to homeownership in today’s competitive market.