Private Mortgage Insurance (PMI) is a kind of mortgage insurance which is used altogether with conventional loans. Similar to other mortgage insurances, PMI gives the protection to lender, not the client, when the client stops doing payment of client’s loan. PMI itself is organized by the lender and it is provided by the private insurance companies. People commonly require PMI when they have conventional loan and do down payment less than twenty percent of total home price. PMI is also required if the equity is less than twenty percent of the total of home value. You can avoid PMI if you save up your money for paying down a 20 percent down payment. If you can’t, the lender will ask you to secure PMI prior to sign off your loan. The insurance company’s goal is to give best protection to mortgage company when you default the note.
PMI sounds a great choice especially for the new homeowners. They can buy a house without requiring to save up the cash for paying. Yes, sometimes this is the only way and even the best way for the new home buyers. Yet, there are some reasons why the new home buyers need to avoid such kind of insurance. To know more the reasons, just read the following information.
Private Mortgage Insurance commonly has cost of rate at 0,5-1 percent of the total amount of loan. A $100.000 loan means a homeowner would be paying $1,000 per year ($100,000 x 1%) or $83,33 per month ($100,000/12). When the house value changes, the homeowner might be paying more than $83,33 per month (depending on actual house value).
- Not be deductible
Private Mortgage Insurance is included as a deductible tax, but only if a married tax payer has earned less than $110,000 for a year. For a married couple that fills it separately, the threshold is about $55,000. There is a rumor that this threshold could be raised for next years, but there is no warranty that it will happen. Many homeowners prefer paying down larger payment to paying down the threshold since they will feel peace on their mind that the loan’s interest is deductible.
- The heirs will be nothing
Most PMI users believe that their kids and spouse will receive a sort of financial compensation when the users die. This is not true. The institution or company is taking the benefits of such policy. The compensation won’t pay directly to the heirs. If the heirs want to be protected and provided some of money for supporting their living expenses after your death, it‘s needed another or separated insurance policy. Don’t have a thought that PMI will be ready to help the clients’ heirs, but only the mortgage lender.
- Hard to be canceled
When the client has the equity up to 20%, she or he doesn’t need to pay PMI anymore. Yet, getting rid of the monthly burden is not simply easy. Most lenders need their clients to draft the letter containing of PMI cancelation. And this takes several months to process it depending on the lenders.
- Payment goes on and always on
One more issue about the lender and PMI is some lenders ask their clients to maintain PMI contract for a certain period. Even if the clients have met 20% threshold, they might still be obligated to paying for their mortgage insurance. So, it’s crucial to re-read the printed PMI contract in more details before being signed.
- Running money away
The clients who haven’t met 20% of purchase price yet, they have to pay their mortgage insurance until their total equity of house at least 20%. This can take some years and during those years, they keep paying the mortgage insurance. This is literally running amounts of money away for years. Then, how to avoid Private Mortgage Insurance (PMI)? In particular situation, a PMI can be avoided by using piggy-back mortgage. The following illustration may make you understand more about this case. You want to purchase $200,000 for a new house, for instance, but your cash is only 10% of total of purchase-price (not enough to avoid Private Mortgage Insurance). By using an 80/10/10 agreement, you now can take the loan out with a total 80% of the house value. This second loan is then called as a piggy-back loan. With splitting up loans, you may have the capability of deducting the interest for both loans and avoiding PMI as well.