Ideally, you should save enough money for a 20% down payment on your new home. However,iIf you weren’t able to do so, you will most likely end up paying private mortgage insurance (PMI), especially if you are taking out a conventional loan. Depending on the size of your mortgage, a PMI would add $100 or more to your monthly mortgage payments.
For some buyers, PMI sounds like a great way to purchase a home without having to save as much money for the down payment. Sometimes, it is the only option for homebuyers. However, there are various good reasons why you should avoid paying private mortgage insurance.
Reasons to Avoid Private Mortgage Insurance (PMI)
A private mortgage Insurance typically cost between 0.5% to 1% of the entire loan amount on an annual basis. This means that on a $100,000 loan, the borrower ends up paying as much as $1000 a year, or $83.33 per month, assuming 1% PMI on the loan. This itself is not a small amount, but according to the National Association of Realtors, the average home price in the U.S. is about $240,000, which means the borrower would end up paying even more money annually as part of the PMI.
- No Longer Deductible
The 2017 Tax Cuts and Job Act (TCJA) ended the tax-deduction for mortgage insurance premium entirely. This means, all this money that you will pay for your PMI will not be tax-deductible anymore.
- Your Heir Get Nothing
Most home buyers hear the word “insurance” and assume that their spouses and children will get some sort of money compensation if they die, which is not true. In case of PMI, the sole beneficiary of the insurance is the mortgage lender himself.
- Giving Money Away
Homebuyers who put less than 20% down for their home purchase will have to pay mortgage insurance until their home equity reaches 20%. This could take years, and it amounts to a lot of money that the homebuyer is just giving away.
- Hard to Cancel
As mentioned above, homebuyers have to pay PMI until their home equity reaches 20%. But eliminating the PMI from your monthly mortgage payments is not that easy. Most of the lenders require the borrower to draft a letter requesting PMI to be cancelled, as well as an appraisal of the home before its cancellation. All in all, cancelling PMI could take months depending on the lender.
- Payment Goes On and On
Some lenders may require you to pay PMI for a designated period of time. This means that even if you have met the 20% threshold, you may still be obliged to keep paying your mortgage insurance.
PMI is expensive. It probably makes sense to wait for a little longer until you can make a larger down payment or purchase a less expensive house, which can make 20% down payment more affordable.
Else, you can see if you can qualify for some government-backed loan options which do not require a 20% down payment. There are some programs especially designed to assist home buyers with the down payment, you can explore them as well.
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