Six reasons to avoid private mortgage insurance

Six reasons to avoid private mortgage insurance

December 8, 2016
private mortgage insurance

If you want to buy a home but you couldn’t save enough money for a 20% down payment, your lender will definitely insist that you get private mortgage insurance prior to signing off on the loan. The reason for this is to protect the mortgage company in case you default on the note.

Private mortgage insurance can be a great help, and many times it is the only available option for new homebuyers. However, there are also many reasons for you to avoid it. This article will examine the six most common problems with PMI.

The Cost

PMI usually costs between 0.5% and 1%of the entire loan amount on an annual basis. THis means that you could be paying as much as $1,000 a year for a loan of $100,000. And, according to the National Association of Realtors, the average home price in the US is over $200,000.

Private Mortgage Insurance may not be deductible

For a married couple, PMI is tax deductible only if the couple earns less than $110,000 per year. This means that dual-income families earning just above that will not be eligible.

Your heirs get nothing

With PMI, you and your family are never the beneficiaries. The only one that benefits from such a policy is the lending institution. You will need a separate insurance policy if you also want to protect your heirs.

You’re throwing money away

It can take years for the total equity of your home to reach 20%. During that time, you will have to pay PMI and, unfortunately, that money is never coming back. You are just throwing it away.

PMI is hard to cancel

You can’t eliminate PMI until your total home equity reaches 20%. And even afterwards you have to go through a lengthy process which requires you to draft a letter requesting that the PMI be canceled and receive a formal appraisal of the home. It can take several months.

Payment can go on and on

Some lenders require homeowners to maintain a PMI contract for a certain period of time. Even if the total home equity reaches the 20% threshold, you may still have to pay. This is why it’s so important to always read the fine print of any PMI contract.

Thomas Hookton is a finance journalist, history buff and science fiction connoisseur. Hit him up via email.

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