What is Private Mortgage Insurance?
Private Mortgage Insurance or PMI protects the lender, for example the bank, if one stops making payments on the loan. Lenders may require one to purchase PMI if the down payment is less than 20 percent of the sales price or the appraised value of the home. PMIs are usually added to the monthly mortgage payment. One may be able to cancel the Private Mortgage Insurance after a few years based on certain criteria, such as paying down the loan balance on certain amount. Borrowers pay their PMI monthly until they have accumulated enough equity in the hone that the lender no longer considers them high risk.
Why should one avoid paying PMI?
PMI seems like a great way to buy house without having to save up the cash for down payment. But here are a few reasons why the borrowers must avoid PMI:
The Cost: PMI usually costs 0.5% to 1% of the entire loan amount. The PMI itself turns out to be a hefty amount in the end, and may lead to spending a lot more than initially intended.
Get nothing in the future: There is a myth that the children of the homeowners taking the insurance will get some of the money as insurance if they die, while this is not true. If you want to protect your children and provide them with money for living expenses upon your death, then you may have to look at other options and obtain a separate policy.
Payment goes on and on: Some lenders require the homeowner to maintain a PMI contract for a designated period of time. Checking with the lender and reading the fine print of a PMI contract for more specifics may be helpful.
How can you avoid paying private mortgage insurance?
A popular option in the past was 80-10-10 or the piggyback mortgage, which used a combination of a second mortgage or home equity loan and the down payment to reduce the loan to value ratio of the primary mortgage. One way to remove the PMI is when the loan is near the threshold value. PMI will be automatically removed by the lender at this time.
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