Private mortgage insurance (PMI) is necessary for clients who are financing with a conventional loan and cannot afford the full 20% down payment. Clients may be wary of the extra cost of PMI, knowing they’ll already be paying a substantial monthly mortgage payment. How does a real estate agent go about explaining the benefits of PMI when the client only sees the financial strain of a higher monthly payment?
It’s important for your clients to know that the more they need to borrow and the lower their credit score, the higher their PMI premiums will be. Help them find ways to increase their credit score and/or possibly save a bit more toward a down payment to qualify for lower premiums.
Some clients are hesitant about buying a home and paying PMI because they know it will not only cost them more each month, but it benefits the lender not them. Help them understand that there are many reasons PMI works in their favor, including the following:
- PMI is temporary
- It gets the buyer into a house sooner
- It will be included in their monthly mortgage payment vs. a separate payment
- They will be building equity in their home as they pay for it
- On average, having PMI results in a large return on investment
Remind your clients that they can get into a house sooner with PMI. Instead of spending years saving for 20% down, and hoping home prices don’t increase, your clients can put less down and still purchase a home. They will also start building equity in their home, something they aren't doing if they're renting.
Clients also need to realize that PMI fees are temporary. Once your client builds up enough equity, they will be able to cancel their PMI. Typically when your client has paid down the principal balance of their mortgage to 80% of the home’s original value, they can ask their lender to drop PMI. Some lenders may ask to have a formal appraisal of the home before PMI can be cancelled -- lenders want to make sure the value of their home hasn't decreased below the original value. They will need to make a request in writing to cancel, must be current on their payments and not have a second mortgage on their home, among other possible factors.
When the principal balance is 78% of the home’s original value, their mortgage provider is required to eliminate PMI. Again, your client needs to be up to date on payments. You can share the following formula which illustrates what it will take to get their loan balance down to 78-80% of the original value so they no longer have to pay PMI:
Mortgage amount owed / original appraised value
Ex. $241,800 / $310,000 = 78%
Other factors which can help shorten the amount of time your client pays for PMI, include the following:
- Single-payment mortgage insurance
- Making payments on time
- Paying extra mortgage payments each year
When clients pay single-payment mortgage insurance, they pay for the mortgage insurance upfront. This keeps their monthly payments low (only paying their monthly mortgage fees), and they save a significant amount on the loan balance over time. Clients who make a lump sum single-payment might qualify for a larger mortgage too.
No matter what type of mortgage insurance, encourage your clients to pay an extra mortgage payment each year (or more) to speed up the process of getting to 78-80% of the home's original value. Not only will they get rid of PMI faster, they will save a considerable amount in interest over the life of their mortgage.
Clients with PMI should be encouraged to make improvements to their new home to shorten the amount of time they carry mortgage insurance. As they renovate their home, the home's value increases and builds equity. Once they have built up 20-25% equity in their home, they can cancel PMI.
As you can see, there are many ways to educate your clients about PMI and how it can benefit them. Some clients may choose to wait to buy a home once they learn about the cost of PMI. Other clients won’t shy away from PMI as it will allow them buy a home sooner, without having to save 20% down. Your role is to educate your clients about PMI and, if they choose not to purchase a home at this time, you can continue to nurture them until they are ready. Either way, they’ll be grateful for the information and they may refer new, potential home buyers to you as a result of your expertise.