Save $70,000 on your first home purchase by avoiding private mortgage insurance
One of the most common questions I hear from first time buyers is: “How much do I need to save up for a down payment.”
It’s a simple question with a somewhat complicated answer. Different banks have different down payment requirements. Sellers prefer a large down payment because it gives them more confidence the loan will be approved. But far and away the most important aspect of down payment size is private mortgage insurance (PMI).
What is PMI?
PMI is a monthly insurance payment that protects banks against default. It is usually required on loans with down payments of less than 20%.
Loans with lower down payments are riskier for banks. Consider an extreme example — a zero percent down payment. Imagine the borrower ends up living in the house but refusing to make any payments on the loan, forcing the bank into a lengthy and expensive foreclosure process. The only damage to the borrower is the hit to his/her credit score. But s/he would have lived in the house for free for quite some time. To use the common cliché, the borrower has no “skin in the game.”
Thus, when a down payment is small, banks typically require private mortgage insurance to protect against default.
The real cost of PMI
PMI costs 0.5–1.0% of the total loan amount per year. On a $1,000,000 house with 10% down that’s as much as $9,000/year or $750/month.
That $750 a month is like rent — it buys you neither equity nor services. It’s even worse than HOA fees, which at least pay for building maintenance, insurance, and security. And unless you make less than $110,000 a year, PMI is NOT tax deductible.
PMI lasts a long time — until your equity in the house reaches 20%. So with a 4.5% interest rate, the borrower won’t reach 20% equity until the end of year six. Six years of PMI = $54,000.
But it’s really more than that, because without PMI that money could have been invested. Annual investments of $9,000 into a mutual fund that earns 7% compounded annually become $70,000 at the end of year 6. So really with PMI you’re leaving $70,000 on the table.
How to avoid PMI — Call to Action!
The simplest solution is to make a 20% down payment. But for many first time buyers in the Bay Area, that amount is simply out of reach.
Some banks are beginning to understand how challenging this is, and are offering special programs whereby they waive PMI with only 10% down.
You can meet three of those lenders at the next HOMESLICE event on June 21st at RE/MAX Futura. Different lenders have slightly different offers, and this is your choice to find out how you can qualify for a 10% down loan on your home purchase without losing $70,000 in PMI.
RSVP here (space is limited): https://www.meetup.com/Homeslice/events/240196179/
6:30pm — Pizza, snacks, cookies and meeting and mingling with the panelists.
7:00pm — Formal introductions, presentations and Q&A.
7:45pm — Networking and follow-up questions
Jasmine Cheng, US Bank
Jasmine is a Mortgage Originator who offers some of the lowest rates I’ve seen on 10% loans with no PMI — as of the beginning of May, 3.75% on a 30-year fixed and 2.75% on a 5/1 ARM.
Steven Sawdey, San Francisco Federal Credit Union
Steve is the Real Estate Lending Manager at SF FCU. He manages their “Poppy Loan” program which offers loans at as little as 0% down with no PMI.
Ryan Mack, SoFi
SoFi has a different underwriting model from traditional lenders, and can also offer 10% down with no PMI to qualified buyers.
Sam Cooper (CalBRE #02023359) is a First-Time Homebuyer specialist with RE/MAX Futura (CalBRE #01776125) and founder of HOMESLICE, a monthly meetup for Bay Area Homebuyers.
All are welcome!