Homebuyers are putting less money down than ever before for their mortgages, the National Associations of Realtors discovered in 2021. While it’s recommended to put 20% down for a conventional mortgage, you can obtain a mortgage with as little as 3% down. And many homebuyers are taking advantage of these programs.
NAR research, published in the 2021 Home Buyers and Sellers Generational Trends Report, showed that the average buyer puts just 12% down. Homebuyers under age 30 put down an average of just 6%.
That could be because 25% of buyers in this age group said that saving for a down payment was the most difficult step in buying a house. Student loan debt was a big obstacle in trying to save for a home, with 43% of buyers ages 22 to 30 saddled with debt.
While securing a loan with less than 20% down is one way to make your dream of homeownership a reality, it does come with one drawback: You’ll have to pay something called PMI, or Private Mortgage Insurance, to your lender.
PMI typically costs anywhere from 0.2% to 2% of the total loan, says Experian, but costs vary depending on your credit score, the loan-to-value ratio of the home and your insurance provider.
PMI protects the lender if you fail to make your mortgage payments.
But you’re not doomed to pay PMI for the life of the loan. Finance experts point out several ways you can remove the PMI payments from your mortgage.
First, your PMI will automatically drop off your mortgage payments once you’ve paid 22% of your home’s appraised value. Once you’ve paid off roughly 20%, however, you can call your lender and ask them to remove PMI. You could save a few thousand dollars with a simple phone call to cancel PMI before you hit that 22% mark in home equity.
Another way to remove PMI is to have your home reappraised. The NAR reports that home prices, nationwide, rose an average of nearly 17% between December 2020 and December 2021, and are continuing to rise in 2022.
If you purchased a home for $300,000 in 2020 and put 10% down, your initial home loan was for $270,000. But if your home is now worth $345,000 — a 15% increase — you’ve reduced your loan to value ratio to hit that magic 20% number in home equity.
CNBC finance experts warn that reappraisals do have associated costs, so you’ll want to consider how much you’ll save doing so.
Alternatively, you can eliminate PMI by refinancing your home loan. This will come with an appraisal that will determine your home’s value today. However, with interest rates rapidly rising, a re-fi may not be the best choice, unless your credit score and finances have improved since you bought your home, and you can qualify for a lower interest rate in today’s market.
Again, run the numbers to see if refinancing makes sense in your situation to save money.
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