We've talked about the benefits of mortgage pre-approval in previous articles and through our social…
Oh no, not mortgage insurance!
California home buyers often react this way when they learn they have to pay for private mortgage insurance (PMI). And that’s understandable. In California, PMI can increase the size of a homeowner’s mortgage payment by hundreds of dollars per month.
What many people don’t realize is that PMI offers some big benefits for home buyers in California. Among other things, it allows you to put less money down and buy a house sooner. For a lot of folks, this benefit more than makes up for the extra amount they have to pay each month.
In this article, we’ll explain how private mortgage insurance helps home buyers overcome one of the biggest hurdles to homeownership.
Private Mortgage Insurance in a Nutshell
Let’s start with the basics before discussing the benefits. What is PMI, exactly, and why do some home buyers in California have to pay it?
Conventional loans don’t always require 20% down. In fact, many home buyers in California are able to make down payments as low as 3% for these types of mortgages. But a smaller investment can bring private mortgage insurance into the picture. That’s why some borrowers choose to put 20% down on a home purchase.
Where Theses Requirements Come From
These PMI requirements actually trickle down from secondary “players” like Fannie Mae and Freddie Mac. Those are the government-sponsored corporations that buy home loans from lenders and resell them via the secondary mortgage market.
For instance, Freddie Mac’s website states that they require “mortgage insurance coverage on mortgages with loan-to-value ratios (LTV) greater than 80%” for some products. Banks and lenders often use these same guidelines when offering loans to borrowers.
In California, the cost of PMI can vary due to a number of factors, including the lender you use. According to a recently updated Forbes article:
“For borrower-paid monthly private mortgage insurance, annual premiums from MGIC, one of the country’s largest mortgage insurance providers, range from 0.17% to 1.86% of the loan amount, or $170 to $1,860 for every $100,000 borrowed, on a fixed-rate 30-year loan. That’s $35 to $372 per month on a $250,000 loan.”
How PMI Can Help California Home Buyers
So we’ve covered the basics. Lenders usually require private mortgage insurance with a down payment less than 20%, and a loan-to-value ratio above 80%. They do this to meet the requirements passed down by secondary organizations like Freddie Mac and Fannie.
Private mortgage insurance protects lenders, but the buyer pays for it. So you might be wondering, what benefits does PMI offer for home buyers in California? After all, it’s the buyer who pays for the policy. What’s in it for them?
Private mortgage insurance benefits home buyers and borrowers in several ways:
- Less money down — Without the PMI industry, many of the low-down-payment options would disappear. Conventional mortgages would require a larger upfront investment, and the 20% down payment we talked about earlier would likely become mandatory across the board. Thankfully, private mortgage insurance prevents this scenario and allows California home buyers to purchase a house with as little as 3% down.
- Buying a home sooner — The smaller down payment made possible with PMI also allows California home buyers to purchase a house sooner. For a person with average income, it could take many years to save 20% for a purchase, especially in the more expensive real estate markets. With private mortgage insurance, buyers can make a much smaller investment and get into a home sooner rather than later.
- More financing options — If every home buyer had to use a 30-year fixed mortgage loan with a down payment of 20%, there would be a lot fewer homeowners in America. Fortunately, borrowers have a lot of options when it comes to financing a home, and that’s partly due to private mortgage insurance. PMI gives California home buyers more flexibility and choices, when it comes to choosing a loan.
As you can see, there are some clear advantages to private mortgage insurance, from a borrower’s perspective.
Ready to Explore Your Options?
Though we’re located in the Bay Area, Bridgepoint Funding works with borrowers from all across the Golden State. We’re a mortgage broker. That means we have access to multiple lenders and many different products.
The main thing to take away from this article is that you have options when it comes to financing a home. We can help you explore those options to find the best type of mortgage loan for your particular situation. Just use the links at the top of this page to get started!