Why Homeowners Should Use a Mortgage Calculator that Show them How Much They Can Save by Cutting Out PMI
People who want to buy a home should always use a mortgage calculator to get a good idea of what they can afford. While inputting data into a mortgage calculator will not guarantee you will pay that exact amount for a monthly payment, it should give you a decent idea of what you can afford before you start talking to the mortgage company and realtor. But not every mortgage calculator is created equal. Some are better than others. One of the less understood features of good mortgage calculators is the ability to see how much you can save each month by getting rid of PMI (private mortgage insurance).
Private mortgage insurance is required on all conventional loans when you have less than 20% equity in the property. That is, if you put down less than 20% on the home, you are required to pay PMI. PMI is an additional monthly cost that can add at least $100 and often substantially more to your mortgage payment.
Why do you need PMI? Because statistics show people who put down less than 20% are more likely to default on their mortgage. If you put down less than that and stop paying on the loan, the mortgage insurance provider will pay back most of the balance to the lender. While mortgage insurance is an extra cost to many homeowners, it helps people with less money down to buy a home. So, mortgage insurance is not all bad.
Back to mortgage calculators. A good mortgage calculator will be able to show you how much you can save every month when you have more equity in the home and do not need PMI.
A good mortgage calculator online to consider that shows the effect PMI has is the one at the Mortgage Reports site. When you visit the calculator web page, you will see the following information in the fields:
- Home price: $250,000
- Interest rate: 4.25%
- Length of loan: 30 years
- Down payment: $50,000 (20%)
The calculator shows you will pay the following each month:
- Principal and interest: $984
- Property tax (estimate): $250
- Home insurance (estimate): $75
- Total: $1309
Now if you only put down 10%, here is what happens, according to the calculator:
- Principal and interest: $1107
- Property tax: $250
- Home insurance: $75
- PMI: $96
- Total: $1509
As you can see, needing to pay PMI adds $96 per month to this example mortgage. Exactly how much your PMI will be depends upon several factors: credit score, down payment, length of loan and amount of loan. But clearly, PMI adds quite a bit to your monthly payment.
This mortgage calculator is important because it really shows how much you will be paying extra each month if you do not have 20% down. Perhaps this will serve as an incentive to save that extra money to put down 20%!
What If You Don’t Have 20% To Put Down?
These days, you are not required to have 20% to put down on most mortgages. The US government wants more people to buy homes because it both stimulates the economy and is better for neighborhood stability. That is why the federal government has mortgage and finance rules that allow lenders to loan with less than a 20% down payment. But the price you pay for the benefit is to pay PMI.
But with a conventional loan, you do not need to pay for PMI forever! Once you have reached 22% equity, the lender is required by federal law to cancel your PMI payment.
How do you get to 22% equity? By paying your mortgage on time, first of all. Eventually, you will get to at least 20% equity if you are paying on your mortgage each month. Also, your home may increase in value. This will cause you to reach 20% equity faster. In 2017, homes across the country increased by 7% on average in value. Some areas saw much higher growth. If you think your home has increased in value, you may want to have an appraisal done to determine if you have reached the magical 20% equity mark.
When you are at 20% equity, you can request in writing that the mortgage provider cancel your PMI. But again, at 22% equity, the lender is required to cancel it, if you have paid your payments on time.
The bottom line is that PMI is a necessary evil for many home owners. But by looking at a good mortgage calculator, it is very helpful to see how having a lower and higher down payment affects your total payment. That PMI payment really can add up over time! If you have to pay PMI, hopefully you will see rapid appreciation in your home and be able to cancel it sooner rather than later.
“Erase PMI saved me $342 per month that I had no clue about, I am very happy that there is something like this to inform people because I had no clue that I did not even need this additional payment”
“When I came across ErasePMI and discovered I could save money, I was all over it – surprised out quick and easy it was, definetly recommending.”