According to a report published earlier this summer, more than 30,000 home buyers and homeowners across Washington State were helped by private mortgage insurance (PMI) last year.
Without PMI, a lot of those folks would not have been able to complete their home purchases due to insufficient down-payment funds. Private mortgage insurance helps buyers bridge this gap, buying a home sooner and with less money down.
Thousands of Homeowners in Washington Benefit from PMI
In June 2018, U.S. Mortgage Insurers (USMI) published a report that showed how many borrowers have benefited from having private mortgage insurance. In Washington State, 31,215 home buyers and homeowners benefited from PMI during 2017.
Definition: Private mortgage insurance is a special kind of policy that protects lenders from losses that could result from borrower default. It is typically required whenever a borrower’s loan-to-value ratio rises above 80%, which is usually what happens with smaller down payments.
You might wonder how private mortgage insurance benefits a home buyer. It is, after all, an added expense that can increase the size of the monthly mortgage payments. The truth is that without the PMI industry, the average home buyer would have to save up a lot more money for a down payment — and therefore wait a lot longer to make a purchase.
Smaller Down Payment, Shorter Path to Homeownership
Private mortgage insurance allows borrowers to take out a home loan with a down payment as low as 3% in some cases. Without it, most home buyers would have to make larger down payments — up to 20% in many cases. That would put homeownership out of reach (or further over the horizon) for a lot of folks.
The industry group USMI found that it would take the average home buyer in Washington State 22 years to save up for a 20% down payment on a median-priced home. But because of the added protections brought on by mortgage insurance, the typical buyer can make a smaller down payment and therefore purchase sooner.
To quote the report mentioned above:
“Since 1957, MI [mortgage insurance] has helped nearly 30 million families become homeowners. In 2017 alone, MI helped more than 1 million borrowers purchase or refinance a mortgage … MI is truly helping those low- to moderate-income Americans who cannot afford to put down the full 20 percent.”
To be clear: private mortgage insurance is not required for all loans. Borrowers who can afford to put down 20% of the home value, or more, can avoid PMI entirely. But a “typical” buyer might have trouble coming up with such a large upfront investment, especially in a high-priced real estate market. And that’s where private mortgage insurance comes into the picture.
Canceling PMI When You Have Enough Equity
As mentioned above, private mortgage insurance in Washington State is usually required for home loans that have a loan-to-value ratio above 80%. Over time, however, homeowners typically lower their LTV by making regular monthly payments.
And when the LTV drops below a certain level, homeowners are usually able to cancel their PMI policies. Typically, this occurs when the loan-to-value falls to 80% or below.
Government vs. Private Mortgage Insurance
Everything mentioned above pertains to conventional mortgage loans in particular. That is, loans that are not guaranteed or insured by the government.
But some government-backed programs require mortgage insurance as well. FHA loans, for example, require all home buyers to have this kind of insurance in place. And in many cases, the mortgage insurance assigned to FHA-backed home loans cannot be canceled until the loan is paid off (or refinanced). PMI, on the other hand, can usually be canceled once a certain LTV threshold has been reached.