Your borrowers face many options when purchasing a home, one of these being the benefits of private mortgage insurance (PMI). As a loan officer, it is your job to serve as your client’s guide throughout the process. So, learn how to best assist borrowers with lower down payments.
As you know, one of the first steps to purchasing a home is to have sufficient funds for a down payment. So, how much should your borrowers put down for a down payment? After all, this factor determines whether they have to buy private mortgage insurance.
Keep reading to learn more about the benefits of private mortgage insurance and how this can benefit you as a loan officer.
What Is A Down Payment?
A down payment is a large, initial payment that is made when a home is purchased. It’s usually a percentage of the purchase price. This “conventional” down payment amount ranges from as little as 3% of the total purchase price to as much as 20% for a primary residence.
The minimum required down payment is usually determined by the type of mortgage your client chooses. Their financial situation and the type of property being purchased also plays a role.
For instance, there are some mortgage types, like VA or USDA loans that have lower than average down payment requirements. The current VA funding fee is 2.3% of the total amount borrowed. Meanwhile, USDA mortgages require no down payment.
What is Private Mortgage Insurance?
Private mortgage insurance (PMI) affords an opportunity for first-time or repeat homebuyers to purchase a property without saving for years to accumulate a 20% down payment.
Borrowers utilizing private mortgage insurance pay a monthly premium to the insurer, and the coverage pays a portion of the balance due to the mortgage lender in the event the borrower defaults on the home loan.
The insurance does not prevent the borrower from facing foreclosure or experiencing a decrease in their credit score should they default. However, there are many other benefits to paying for private mortgage insurance.
Why Require Private Mortgage Insurance?
Lenders often require private mortgage insurance from borrowers with a low down payment because the lender is assuming additional risk. PMI protects the lender in the event that the borrower defaults on the loan, it also offers assistance for borrowers who might not otherwise be able to purchase a home.
Borrowers can avoid having to purchase PMI by putting down at least 20% on their new home. So, buyers who do not have at least 20% for their down payment face the additional cost of PMI.
Mortgage Insurance Options
There are two types of monthly borrower-paid premiums upfront. These are typically referred to as standard monthly premiums and deferred (or zero) monthly premiums.
With the standard option, the borrower pays the first monthly premium at closing. There is no mortgage insurance premium due at closing, which results in lower upfront costs for the borrower. On the other hand, some lenders may prefer to utilize the deferred monthly option as it delays the initial PMI payment until the borrower makes their first loan payment.
The standard monthly and zero monthly options both have the same premium rates. So, this means that the price is the same. The difference between the two options is simply when the first PMI payment is made.
How Much Does PMI Cost?
PMI is similar to other types of insurance. It relies on insurance rates that can change daily. After all, there are many benefits of private mortgage insurance.
The average cost of private mortgage insurance, or PMI, for a conventional home loan ranges from 0.5% – 1% of the loan amount per year.
How Long Do Borrowers Have to Pay for PMI?
How long this takes varies, depending on the borrower and their financial situation. A homeowner will pay for PMI until they reach 20% equity in their home. On average, borrowers pay for their private mortgage insurance for five to eight years.
What Factors Affect This Calculation?
There are two additional factors that can reduce the amount of time that PMI requires. The first is the amortization period, or the schedule of mortgage payments. The borrower can stay ahead of this schedule by paying additional principal on a monthly or periodic basis. Then, they’ll shorten the time it takes to reach 20% equity.
The second factor is home-price appreciation. Although, appreciation tends to be unpredictable. Also, in many instances, it decreases the length of time that mortgage insurance requires.
What are the Benefits of Private Mortgage Insurance for Borrowers?
There are many options to consider when working with borrowers who have less than 20% of the total purchase price saved for a down payment. As an originator, borrowers are likely looking to you for guidance, and mortgage insurance can be a great option for them. PMI can help your clients get into a home much sooner compared to spending years saving up for a 20% down payment.
Although PMI will raise the overall cost of purchasing a home for your customers, the benefits of private mortgage insurance can outweigh the price tag for many borrowers. Plus, paying for PMI is not a lifelong or even a life-of-loan commitment!
Closing Email of the Week
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Your borrowers may have many questions throughout the loan process. So, prepare to serve as their guide and let them know the benefits of private mortgage insurance. After all, explaining the pros and cons of private mortgage insurance does not have to have complications. Education and transparency are key to building a trustworthy relationship with your clients!