What Is Private Mortgage Insurance and Can It Help You?
Private mortgage insurance (PMI) is necessary for those who do not have enough savings to put at least a 20% down payment on a home. PMI typically costs between 0.2% and 1.5% of the loan’s balance on an annual basis. The total amount you pay for PMI ultimately hinges on your credit score, the loan term and the amount of the down payment. Your PMI cost is broken down into a dozen premiums tacked onto the monthly mortgage bill.
Why PMI is Necessary
PMI is an absolute must from the perspective of the lender as it provides financial protection against home-seekers who have little money to put down on a property. If the buyer does not make the scheduled payments and the home is foreclosed, the mortgage insurance provider covers part of the lending company’s loss. Mortgage servicers typically mandate the borrower pay for PMI until a considerable portion of the balance is paid down. You will likely need PMI until a minimum of 20% to 25% of the mortgage is paid down.
PMI is not all Bad
If you do not have at least 20% of the home’s value available in cash for a sizable down payment, you are likely dreading paying the monthly PMI premium. However, PMI is not completely bad. If you absolutely have to pay PMI each month, do not lose hope. It might be possible to deduct your mortgage interest including PMI at the end of the year when you do your taxes. Furthermore, PMI should be thought of as a means to an end. This financial tool helps you land your dream home, end the cycle of apartment living and finally enjoy life.
However, it might make more financial sense for some to wait until they have saved up at least 20% of the down payment necessary to obtain approval for a home mortgage. Even if you qualify for a mortgage, PMI will be another monthly expense so make sure you have enough room in your budget to cover this extra cost.
A PMI Commitment Usually Lasts Several Years
Once you make the decision to pay PMI each month, you will likely have to pay it for a few years. However, if the property has appreciated to the point that you have at least 25% equity after a couple years pass, you can end the coverage. Once five years pass, you need merely 20% equity to end your monthly PMI bill. According to the federal Homeowners Protection Act, PMI is automatically canceled when the balance reaches 78% of the home’s purchase price, even if the market value has decreased in the meantime. This means if you put 10% down on the home and have ea 30-year mortgage, the balance will not hit the 78% threshold for seven years.
When in doubt, take a look at your yearly notice that explains your unique PMI payments. Be sure to plan your annual budget accordingly with your unique PMI expense in mind. We would be remiss not to note those who have a second mortgage such as a home equity line of credit or a home equity loan will find their equity is reduced accordingly. This equity level ultimately dictates whether PMI is necessary.