Buying a home can be a stressful process, especially if you are a first-time buyer and you didn’t know about all the expenses and things you need to do besides the down payment and the loan. Private Mortgage Insurance is one of those things you may or may not be asked to pay and there are some people that say you should try to avoid paying it. That’s why today we will give all the information about it so you know if it is worth it and if you should get it.
What is Private Mortgage Insurance?
Private Mortgage Insurance, also known as PMI, is a kind of mortgage insurance that will protect the mortgage company in case you stop doing the monthly payments to the loan company.
PMI is not a must for everybody. In fact, you will only be required to have it in case you are getting a conventional loan and your down payment is less than 20%. This can be a great choice if you haven’t save enough money to have a down payment of at least 20% and it is often what first time buyers do.
In case you are getting other types of loans, like FHA loans, you will be required to get other types of mortgage insurance, like “Mortgage Insurance Premiums”. Those are managed differently and have their own rules.
How does Private Mortgage Insurance work?
First, Private Mortgage Insurance is usually paid through monthly premiums and the amount of money you have to pay will depend on the value of the house, the down payment you make and your credit score. The higheryour down payment/credit score, the lower the premiums you will pay.
Monthly premiums of PMI usually go between $30 and $70 for every $100,000 you borrow and you start paying with your mortgage payments. However, there could be more options available, like paying a one-time up-front premium at closing. Ask your mortgage lender about it.
You will have to pay PMI for as many months it takes you to build enough equity in your home to equal 20% of the value of your house and have a loan-to-value ratio (LTV) of 80%.
Can I avoid Private Mortgage Insurance?
If your down payment is less than 20% there are a few way to avoid PMI.
- Getting a “piggy-back mortgage”, where you take a smaller loan for enough money to cover the 20% down payment and avoid PMI.
- Some loans do not require PMI with a down payment of less than 20%, like VA loans and physician loans.
Pros and cons of getting Private Insurance Mortgage
As it was mentioned above, PMI lets you get a loan if your down payment is less than 20%. This is useful in markets where house prices are rising and when mortgage interest rates are also rising, so you don’t have to save money and wait until everything becomes more expensive.
However, there are some downsides. In most cases, PMI is not tax deductible. Also, you may not stay in that house long enough to finish paying PMI, and sometimes you may have finished paying but your lender may had asked you to pay it for a specific period of time. Be careful when getting it and ask if you will be obligated to pay for a period of time even if your equity already tops 20%.
Remember PMI protects the lender, not you, so if you stop doing your mortgage payments, the lender will still get his money through the private insurance policy but your credit score may suffer anyways or you could lose your house.