How to Avoid Paying Private Mortgage Insurance
Owning a San Clemente condo or home comes with a variety of expenses, none of which are bigger than the monthly mortgage payment. Since the average cost of real estate in San Clemente is around $675,000, the majority of potential buyers will utilize a home loan to complete the purchase. The past few years have seen the mortgage industry tightening the purse strings, making it harder for buyers to qualify for a home loan; due to millions of bad loans given out during the housing bubble of 2004-06, lenders are looking to minimize the risk they take on. One of the biggest weapons a lender has to offset home loan risk is charging borrowers for Private Mortgage Insurance (PMI). PMI allows a lender to recover financial losses in the event that the borrower defaults on the loan; items covered under a typical PMI policy include the remaining principal owed, deficiency in the value of the condo or home, and foreclosure costs.
Lenders will require borrowers to carry private mortgage insurance if they are taking on more risk – in essence, if they are exceeding the margin that makes them free from loss in the event of buyer default. The standard ratio where lenders feel comfortable enough to not require PMI is an 80/20 loan-to-value; this means that the buyer puts down 20% towards the purchase of the condo or home and the lender loans the remaining 80%. A standard PMI yearly payment is approximately 1% of the loan amount, and FHA-backed loan are even higher at 1.5-1.75%.
For many potential San Clemente condo and homebuyers, a 20% down payment is asking a lot, so PMI will come into play. So how can this be avoided? For starters, even if you can’t put down 20%, make as large a down payment as possible and make larger monthly payments each month to buy down the principal owed faster. If you can put down 10% initially and then make larger monthly payments over the next year or two to buy down the next 10%, you can eliminate your PMI policy at that time. There are also low down payment programs offered by select financial institutions (Bank of America and BBVA Compass are examples) that do not charge PMI based on your credit history and current occupation (these programs are available to doctors, lawyers, etc.). Although PMI is unavoidable for the majority of San Clemente condo buyers and home buyers, paying your loan off in a shorter amount of time will lessen the time you have to carry this policy.