The Tucson real estate market, like most other markets across the country, has experienced a steady increase in value over the last several years. Tired of renting, you decided that you want to own your own home now. While not the 20% experts recommend, you saved up money for your down payment, closing costs and other expenses. Because you won't be putting 20% down, you're going to get hit with PMI (private mortgage insurance). What exactly is PMI and why do you have to pay it? Let me explain.
What is PMI?
First of all, let me answer the basic question: what is PMI? Private mortgage insurance covers the lender in case you default on your loan. When a Tucson home buyer purchases a property with less than 20% down, they automatically pay PMI. How much you pay depends on how much you put down, the size of the mortgage, the length of your loan, and your credit score. This varies between 0.25% to 2.0% of your balance. Most lenders usually charge 0.5% to 1.0%. For example, let's say your loan balance was $200,000 (slightly above the $187,600 median value right now). Just 1% of the loan balance comes to $2,000 per year or approximately $167 per month. I could think of a few other things I'd rather spend that $167 a month on...like the principal of my loan perhaps?
How Long Do I Have to Pay PMI?
The law requires that lenders cancel PMI once the loan-to-value (LTV) reaches 78%. That means, once the total of your down payment and whatever you've paid on your loan so far reaches 78% of the purchase price, the lender must cancel this added insurance. Under the Homeowners Protection Act, this happens whether your property goes up in value or not. If you don't want to wait for your lender to automatically cancel the insurance, talk to your lender once your loan-to-value reaches 80%. On a $200,000 purchase, that means when your balance reaches $160,000. As long as your mortgage payments are current, you're a borrower in good standing, and you have no liens on the property, your lender should be able to accommodate this.
Like I said before, we've been experiencing a steady increase in home values lately. If you bought your Tucson home a couple of years ago, your current value may place your equity at 20% or higher. Some lenders allow you to cancel PMI early if you have at least 25% equity from appreciation after owning your home two to five years. However, they may require that you obtain an appraisal to prove your property's current value. Another way to cancel PMI is to refinance. However, you should seriously weigh the cost to refinance against the savings you may receive from the private mortgage insurance. It might not be worth it.
If you have any questions about private mortgage insurance, I highly suggest that you speak to your lender or a trusted Tuscon REALTOR®. Don't let PMI deter you from purchasing a property right now. Home prices continue to rise. Maybe 20% down is out of reach at this time. Or, perhaps you want to keep some money set aside in case of emergencies instead of tying it all up in your home purchase. PMI is a small price to pay to become a Tucson homeowner right now. Contact me when you're ready to start looking.
Rebecca Schulte, Schulte Real Estate Group, Your Source for Tucson Real Estate