Real estate agents in Lake George, Bolton Landing and the surrounding Adirondacks are seeing more first-time homebuyers than normal for a large vacation home/second home market. That’s not surprising when you consider that more renters are opting to buy vacation homes as their first home these days. However, this new trend in Adirondack real estate means we’re also fielding more questions about PMI, or, as it’s more commonly phrased, “why is my mortgage payment higher than I thought it would be?”
To clear this up, here’s a quick explanation on PMI and how homebuyers can avoid paying it.
Q: Why is My Mortgage Payment Higher than I Thought It Would Be?
As a prospective homebuyer, you’ve probably been visiting lots of real estate websites, and many of the property listings provide an option to calculate the monthly mortgage payment. Unfortunately, these calculators don’t always include all the costs, so you think your payments are going to be anywhere from $100-$300 lower than they actually are. The biggest surprise cost is typically mortgage insurance, or PMI.
Q: What is PMI?
A: While you can typically get a mortgage with a down payment of just 3.5% of the purchase price, lenders consider a down payment of less than 20% a much riskier investment. In this case, they require you to take out PMI, or private mortgage insurance. PMI protects the lender in the event that you default on your mortgage or the home goes into foreclosure.
Note: PMI only applies to conventional loans. Federal Housing Administration (FHA) loans have their own version of mortgage insurance.
Q: How Much Does PMI Cost?
PMI typically costs between 0.3% and 1.5% of the entire loan amount annually. For example, if you have a 1% PMI fee on a $150,000 loan, the cost would be $1,500 per year, or $125 per month. This fee is typically included in your monthly payment, but, in some cases, it is paid as a one-time upfront cost at closing.
As long as you stay current on your payments, your lender must terminate the PMI on the date the equity in your home reaches 22% and the loan balance is 78% of the original home value.
Q: How Do I Avoid Paying PMI?
A: The most obvious way to avoid PMI is to make a down payment of at least 20%, but many first-time homebuyers just don’t have those funds available. Of course, the other option is re-evaluate your home search and only consider homes for which you have sufficient savings to cover the 20% down payment.
If neither of these options appeal to you, a second mortgage, sometimes called a piggyback loan or down payment mortgage is another alternative. Although you are committed on two loans, PMI is not required since the funds from the second loan are used to cover the 20% down payment.
This makes sense if you’re planning to borrow a substantial amount, since it can sometimes get you a lower interest rate on your first loan. Plus, you have the option to pay off the second loan faster and save on interest payments. As an added benefit, you can also deduct the interest you pay on both the loans from your federal income taxes, but the mortgage on the second loan is only deductible up to the first $100,000.
More First-Time Homebuyer Advice
For many homebuyers, PMI is a necessity to buy a home. Especially first-time buyers, who simply haven’t saved up the necessary funds to cover a 20% down payment. It’s an added expense, but it could be worth it if you are eager to own your own home.
With that said, I encourage you to consider your options. There may be more affordable homes out there that would allow you to cover the 20% down payment, if you just know where to look. By enlisting the help of an experienced real estate agent for Lake George, Bolton Landing and the surrounding Adirondacks, I not only can help you determine your budget, I will work to find homes that fall within your budget and help you negotiate a good price.