A June 2018 report from the industry association U.S. Mortgage Insurers (USMI) showed that mortgage insurance helped nearly 73,000 borrowers in California purchase or refinance a home in 2017. Without this insurance, many of the home buyers in that group would still be saving up for a down payment.
How Mortgage Insurance Benefits Home Buyers
Home buyers in California typically aren’t thrilled about having to pay for mortgage insurance. After all, it’s an added cost that can increase the size of your monthly payments.
But there’s a clear upside to California mortgage insurance policies. Without them, a typical home buyer in the state would have to wait a lot longer — and save up a lot more money — in order to buy a house.
Private mortgage insurance (PMI) is usually required whenever a borrower’s loan-to-value ratio rises above 80%. This is what happens when borrowers make down payments below 20%. If it weren’t for this type of insurance, home buyers would have to save up for a larger down payment — up to 20% in some cases. And that would be a major obstacle for a lot of borrowers.
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That’s where mortgage insurance comes in. It helps bridge the gap, so to speak, by allowing qualified borrowers to qualify for a home loan with a down payment as low as 3% in some cases. By minimizing this upfront out-of-pocket expense, PMI shortens and simplifies the path to homeownership.
California One of the Top States
In California, there are quite a few borrowers who benefit from PMI. It was the #2 state in the nation last year, in terms of borrowers who relied on mortgage insurance to complete their home purchase or refinance.
Here were the top five states where homeowners were able to purchase or refinance a home in 2017 due to mortgage insurance:
- Texas (79,030)
- California (72,938)
- Florida (69,827)
- Illinois (47,866)
- Michigan (41,810)
Saving for a Down Payment in Less Time, With PMI
The USMI analysis and report mentioned above also revealed how long it would take home buyers to save up for a 20% down payment (if that was an industry-wide requirement). Not surprisingly, California was at the top of the list for longest wait times.
To quote the report:
“The number of years to save the full 20 percent also varies across the states. California has the longest wait time at 37 years, followed by the District of Columbia at 36 years, and Hawaii at 34 years. These calculations are based off 2017 average home price in the states, according to the National Association of REALTORS®.”
But don’t panic. This is a theoretical analysis to show what it would be like without the mortgage insurance industry. Because of the PMI industry, home buyers in California can purchase homes with much smaller down payments and less savings.
These days, conventional home loans backed by Freddie Mac and Fannie Mae allow for down payments as low as 3%. So the average home buyer could save up that amount in much less time than the 37 years mentioned in the quote above.
Over the last 60 years, nearly 30 million families across the country were able to buy homes sooner as a result of the mortgage insurance. Yes, it’s an added cost that can (slightly) increase the size of the monthly payments. But it comes with a big upside — smaller down payments and a much shorter wait time for purchases.