How To Avoid PMI (And Why You Want To)

What is PMI?

PMI  (private mortgage insurance), is usually required by lenders if you do not put down, at least, 20%. If you get a loan which requires a lower down payment, you will probably be required to add this coverage in. What does PMI do? It products the lender in case you default on your note. It does not protect the borrower, but it protects the lender. Do I need to write that again? PMI protects the lender in case you default on your mortgage.

Why Avoid PMI?

This may seem like a small price to pay if you do not have a twenty percent down payment. In fact, it may be the best – or only – option for some buyers. However, in these days of mortgage problems, you may want to take at some reasons to avoid this coverage if you can.

Cost of PMI

This coverage usually costs about 1% of the loan value every single year. If you have a $200,000 loan, you are paying $2,000 a year to protect your mortgage company. That is very generous of you. But if you feel the need to donate money, I can suggest several charities like the We are The World for Haiti or a local food bank.

So here you are, paying about $160 a month for mortgage company protection, and this money is not adding to your equity or the asset value of your home.

Taxes

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One major benefit that many homeowners take advantage of is the ability to deduct their mortgage interest. Your PMI premiums may not be deductible at all. The rules state that you must make less than a certain threshold to benefit from this deduction. Since tax rules change all of the time, I am not going to post the income levels. It should be easy enough to look it up on IRS.gov.

Your Family Does Not Benefit

When you think of insurance, you probably think about protection your family or finances. The lender, not you, is the beneficiary on this type of coverage.

Lost Money

We covered this a little above, but you understand you will probably have to pay your PMI untill you manage to have a 20% equity stake in your home! But this added expense will probably mean that you will not arrive at that goal for more years. You are probably trying to set your monthly payment at an affordable rate, and the cost of this coverage will increase your bill.

Does Not Always Automatically Cancel

You may have to draft a letter, or even get a formal home appraisal, before you can cancel this when you do have a 20% equity stake in your home. This all takes more time and money.

Is PMI All Bad?

Lots of people pay for this coverage, and there are some valid reasons. As we stated above, this may be the only way to qualify for a loan. Purchasing a home makes sense for your family even if you do not have a 20% down payment, so you accept the added cost. Many families can deduct the premiums, so the total cost will be less if you count the deduction.

So we are not saying that this product is always a deal killer, but we just want you to be aware what you are purchasing before you commit.

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