Lenders generally prefer homebuyers put down 20 percent on any Irvine house they buy before they extend a loan for the property. The reason for this is that a homebuyer’s 20 percent down payment creates equity in the property, which reduces the lender’s risk. Because the home serves as underlying collateral, a lender who has loaned out 80 percent of the home’s value as opposed to 100 percent of the value has a better chance of selling and regaining their principal in the event of default and foreclosure.
When homebuyers aren’t able to put 20 percent down, lenders will often require them to purchase something called private mortgage insurance (PMI). PMI is a policy that protects the lender in the event that a borrower defaults. The policy will pay the lender back for the loan, but the premiums must be paid by the homeowners. PMI policies generally cost homeowners anywhere from .5-1.5 percent of the borrowed amount each month.
PMI is not something that borrowers need for the life of the loan, and, in fact, homeowners ideally want to maintain PMI only as long as necessary. Once homeowners have 20 percent equity in their homes, they may be able to discontinue the PMI policy. This can happen if the home increases in value, but an appraisal may be necessary to prove the increase. Otherwise, by simply paying the principal back with a monthly mortgage payment, a borrower can gradually reduce the principal and work toward 20 percent equity. It’s important that borrowers keep track of their payments and principal because lenders will not discontinue PMI on their own until a borrower has paid back 22 percent of the loan principal. But technically, borrowers can get the policy discontinued once they’ve paid 20 percent of the loan, which puts their loan-to-value ratio at 80 percent.
The home-buying process can be both complex and confusing. If you’re looking at homes for sale in Irvine, work with an experienced agent who can explain things along the way, ensure you get a great deal on the home of your dreams, and provide you with peace of mind when signing the contract. Call (714) 454-6304 to see what’s available and schedule a showing!