Avoid PMI - How and Why to Avoid Private Mortgage Insurance
Private Mortgage Insurance Protects The Lender This product, usually called PMI, covers the lender in case a borrower defaults on a home mortgage.
It does not, however, protect the borrower.
It will not remove your responsibility for a loan, and it will not protect your credit.
It usually required if a borrower cannot put down twenty percent of the home purchase price.
Borrowers like it because it helps reduce their risk.
To be fair to lenders, they are taking a lot more risk when they lend to people who do not have twenty percent to put down.
Many factors may prevent them from getting the full purchase price of a home back if a borrower defaults.
In addition, the type of borrower who can come up with a larger down payment may have more resources.
They will be less likely to default.
When Does PMI Help a Borrower? Lots of people take this coverage in order to qualify for a loan.
It is not always a bad option.
Sometimes it may be the only way to qualify for a mortgage on a home that makes sense to buy.
For moderate income families, the premiums are also tax deductible, so the real cost is less than the price.
You need to consider these factors when you sit down and figure out if a certain loan and home purchase is the right one for you.
Why Avoid PMI? Cost is the biggest reason to look for another option.
The premium could be about one percent of your loan per year.
This is simple to illustrate.
For every $100,000 of your loan, you can pay $1,000 a year.
Spread over monthly payments, this is an extra eighty dollars.
For a $250,000 loan, this is almost $200 a month.
Look at how much harder it will be to budget for mortgage payments if you have to pay for this.
And of course, these payments mean that less of your check actually goes towards building up your equity.
So it can take you longer to ever get to that 20% equity point where you can cancel the PMI! How Can You Avoid Private Mortgage Insurance? There are some ways to avoid this extra payment, and you will want to consider these options.
But before you choose a loan, be sure you understand your alternatives.
It does not, however, protect the borrower.
It will not remove your responsibility for a loan, and it will not protect your credit.
It usually required if a borrower cannot put down twenty percent of the home purchase price.
Borrowers like it because it helps reduce their risk.
To be fair to lenders, they are taking a lot more risk when they lend to people who do not have twenty percent to put down.
Many factors may prevent them from getting the full purchase price of a home back if a borrower defaults.
In addition, the type of borrower who can come up with a larger down payment may have more resources.
They will be less likely to default.
When Does PMI Help a Borrower? Lots of people take this coverage in order to qualify for a loan.
It is not always a bad option.
Sometimes it may be the only way to qualify for a mortgage on a home that makes sense to buy.
For moderate income families, the premiums are also tax deductible, so the real cost is less than the price.
You need to consider these factors when you sit down and figure out if a certain loan and home purchase is the right one for you.
Why Avoid PMI? Cost is the biggest reason to look for another option.
The premium could be about one percent of your loan per year.
This is simple to illustrate.
For every $100,000 of your loan, you can pay $1,000 a year.
Spread over monthly payments, this is an extra eighty dollars.
For a $250,000 loan, this is almost $200 a month.
Look at how much harder it will be to budget for mortgage payments if you have to pay for this.
And of course, these payments mean that less of your check actually goes towards building up your equity.
So it can take you longer to ever get to that 20% equity point where you can cancel the PMI! How Can You Avoid Private Mortgage Insurance? There are some ways to avoid this extra payment, and you will want to consider these options.
- Put down 20%.
If you have the money, consider starting your loan with more equity.
If you do not have enough to put down twenty percent, maybe you should consider purchasing a cheaper home.
We have all seen how much trouble many home owners have had in recent years because they did not have much equity in their homes. - Piggy Back Loans.
This used to be a more common option, but the recent mortgage crisis e have shown us that it is a risky more.
Borrowers would get 80% loans, a smaller loan for 10%, and then put down 10% in cash.
The smaller loan may have a higher interest rate, but it will help a borrower avoid the extra coverage. - Local and State Programs.
Some communities have first time homeowner programs which help borrowers find lower interest loans, or at least loans for the down payment. - FHA or VA Loans - If the government will insure the mortgage, you may also be able to get out of PMI, or.
at least pay a lot less for it.
If you have military service or a moderate income, look into these programs.
But before you choose a loan, be sure you understand your alternatives.