What Home Buyers Need to Know About PMI
Many potential home buyers can’t afford to make a 20 percent down payment. Fortunately for them, there are plenty of loan options that don’t require 20 percent down.
But cutting costs at closing isn’t always in a buyer’s best interest.
While a low down-payment requirement may make it easier to finance the purchase of a home, putting less than 20 percent down often results in a higher interest rate and the inclusion of private mortgage insurance (PMI).
As a real estate agent, it’s important to ensure your buyer clients are aware of the extra costs they may incur by making a low down payment. PMI, in particular, is an important topic to cover as it increases mortgage costs with little benefit to the buyer.
What Is PMI?
PMI is a form of mortgage insurance that protects the lender against loss. It’s typically required when borrowers get a conventional loan and pay less than 20 percent down. The majority of PMI policies are paid monthly, but it’s also possible to cover PMI at closing with a large upfront payment.
Some buyers believe that PMI protects them from foreclosure, but this isn’t the case. While borrowers are the ones paying premiums, the only real benefit PMI offers them is the ability to purchase a home without making a 20 percent down payment.
3 Things Home Buyers Need to Know About PMI
When discussing financing with a buyer, you should determine how much they plan to put down. If they plan on putting less than 20 percent down, you should have a discussion with them about PMI.
Here are three things you should mention:
PMI can be cancelled
Once the principal balance of the mortgage falls to 80 percent of a home’s original value, PMI can typically be cancelled. Loan docs should disclose the date that this will occur, but it isn’t set in stone. PMI can be cancelled early by making additional principal payments.
PMI and MIP are different
There are different types of mortgage insurance, each governed by different rules. PMI is associated with conventional loans. A mortgage insurance premium (MIP) is what borrowers pay toward FHA-insured loans. While borrowers can cancel PMI, refinancing is often the only way to eliminate MIP.
PMI premiums vary
There isn’t a set premium that all borrowers pay toward mortgage insurance. Instead, PMI payments are set based on the perceived risk to the lender. Factors like credit score and the down payment amount will affect the PMI premium.
Refer Buyers to a Knowledgeable Loan Officer
While agents should understand the financing options available to buyers, keeping up with all of the changing rules regarding mortgages just isn’t realistic. By referring buyers to a good loan officer, you can ensure they’ll get the guidance needed to make an informed decision regarding financing.
Besides, building a relationship with a knowledgeable loan officer can create a new stream of real estate referrals. Ultimately, this arrangement won’t just be good for your home buyers, it’ll be good for business.
Pat Hiban is the author of NYT best selling book “6 steps to 7 figures — A Real Estate Professional’s Guide to Building Wealth and Creating Your Destiny”, founder of Rebus University and the host of Pat Hiban Interviews Real Estate Rockstars an Agent to Agent Real Estate Radio Podcast with Hiban Digital in Baltimore, Maryland. Follow him on Facebook or Twitter.