If you’ve been urged to “put 20 percent down” as a down payment, there is a reason for that figure. And despite what you might think, It’s not arbitrary. By putting 20 percent down on an apartment, you avoid paying something called “private mortgage insurance,” or what is known as PMI.
What is PMI?
Private mortgage insurance (PMI) is a type of insurance used with conventional home loans. Borrowers who don’t have a down payment of at least 20 percent are typically required to purchase PMI. The cost is typically 0.5% to 1% of the entire loan amount on an annual basis, depending on credit score and insurer. For example, on a $700K home purchase with 15 percent down, the PMI would cost approximately $295 a month.
The good news is that New Yorkers typically paid for a quarter of their home’s value up front, or 27.1 percent of a condo’s total sale price in 2015. And the range of median down payments by borough ranged from 30.6 percent in Manhattan (approximately $447,398 down) to 20 percent in the Bronx (approximately $25,200 down). See median down payments by borough here.
In general, there are two types of mortgage insurance:
- Mortgage insurance premiums (MIP) is mortgage insurance sold by the government and is designed for those with FHA or VA loans. MIP for FHA and VA loans is run differently and managed internally than private mortgage insurance, and they have their own set of rules.
- Private mortgage insurance (PMI) is mortgage insurance for conventional loans sold by the private sector.
Several important things to know about PMI:
- It’s designed to protect your lender if you default on your loan.
- It allows you to purchase a home if you don’t have 20 percent of the home’s purchase price saved up for a down payment.
- If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is usually required.
If you are required to buy private mortgage insurance, its cost will be added to your monthly mortgage payment. But, beware that like interest, property tax and homeowner’s insurance, payment of PMI does not build equity in your home. Borrowers can opt out of monthly payments if they purchase single-premium mortgage insurance. The single premium can be paid as part of the closing costs or financed into the loan.
The federal Homeowners Protection Act of 1998 requires lenders to remove the PMI when the loan’s balance is 78 percent or less of the home’s original value. Homeowners can request removal once the loan’s balance is 80 percent or less of the home’s current value. If you’re not current on payments, PMI will stay in effect until payments are brought up to date.
If you think you’re eligible to have your PMI canceled, contact your loan servicer and ask about their requirements. The lender will tell you what proof they need to establish the value of your home; some lenders use their own valuation tools, while others rely upon tax valuation or a report from a professional appraiser.