Home buyers in Washington often view private mortgage insurance (PMI) in a negative light. They see it as something to be avoided at all costs. And that’s understandable.
After all, PMI does increase the size of your monthly payments. It’s only natural to shy away from something that causes you to spend more money on your housing costs.
But private mortgage insurance also provides some major advantages for home buyers across the state of Washington. We’ve touched on some of these benefits in previous articles and reports. Today, we will take a closer look at how Washington home buyers can actually benefit from having PMI.
What Is Private Mortgage Insurance
Before we get to the benefits of private mortgage insurance for borrowers, we first need to explain what it is and how it works. This will be especially helpful for first-time buyers in Washington, who might be less familiar with the concept.
Private mortgage insurance (PMI) is a type of insurance that protects the mortgage lender in case the borrower defaults on their loan. PMI is typically required for borrowers who make a down payment of less than 20% of the purchase price of the home, which results in a loan-to-value (LTV) ratio above 80%
PMI is usually paid monthly as part of the borrower’s mortgage payment. The cost can vary but typically ranges from 0.3% to 1.5% of the amount borrowed. PMI can be canceled once the borrower has paid down enough of the mortgage balance to reach 20% equity.
Home buyers in Washington can avoid mortgage insurance entirely by making a down payment of more than 20%, or by combining two loans so that neither of them has an LTV above 80%. But those strategies aren’t practical for every borrower.
How PMI Benefits Home Buyers in Washington
Private mortgage insurance helps offset the risk of making loans to borrowers with smaller down payments. By doing so, it also makes these smaller down payments possible.
Without the private mortgage insurance industry, most home buyers in Washington would have to make down payments at or near 20%. And that would make homeownership cost-prohibitive for a lot of people who are currently able to pursue it.
Let’s take a closer look at the advantages PMI offers to home buyers:
It allows you to put less money down up front.
One of the biggest benefits of mortgage insurance is that it can help home buyers who don’t have a large down payment. With mortgage insurance, home buyers in Washington (and elsewhere across the U.S.) can make a down payment as low as 3% or 5%, instead of the traditional 20%.
This is a big deal, because it puts homeownership within reach for a much larger audience. If it weren’t for PMI, we would see a huge decline in the number of people who could afford to buy a home in Washington. That’s because buyers would have to put more money down up front.
It helps you by a home sooner rather than later.
It can take years to save up for the down payment on a home purchase in Washington. According to the National Association of Realtors, the median time it takes home buyers to save up for a down payment is two years. In higher priced real estate markets, it can take much longer than that.
The more money you have to save in advance, the longer it takes for you to reach that goal. Private mortgage insurance allows buyers to purchase a house sooner rather than later, by lowering the down payment requirement.
It allows buyers to purchase more expensive homes.
By reducing the amount of cash required up front, mortgage insurance also allows buyers to afford more expensive homes that would otherwise be out of reach. This factor can benefit buyers in many cities across the state of Washington, but especially in those areas with higher than average home prices.
A Shorter, Easier Path To Mortgage Financing
As you can see, there are some legitimate benefits to private mortgage insurance when it comes to buying a house in Washington.
Yes, it does increase the size of your monthly payments by a small amount. But it can also clear many of the upfront hurdles associated with a home purchase. It reduces risk for banks and lenders, allowing them to offer loans to people who might not otherwise qualify for them.
When a home buyer makes a down payment on a house, they’re basically contributing their own money toward the purchase price. This in turn reduces the amount of money that the mortgage lender has to loan to the home buyer, reducing risk across the board.
If there were no mortgage insurance, lenders would require larger down payments to compensate for the increased risk. That’s because without mortgage insurance, lenders would be on the hook for the full amount of the loan if the home buyer were to default.
Also, if PMI went away, banks and mortgage lenders would likely require higher credit scores and impose stricter lending guidelines. This would make it even harder for the average home buyer in Washington to achieve their goal of homeownership.
Here’s the bottom line to all of this. By allowing home buyers to make lower down payments, mortgage insurance increases access to homeownership for a wider range of individuals and families. So it clearly has an upside.