Why Avoid Private Mortgage Insurance (PMI)?
When purchasing a home, saving up for a 20% down payment is ideal. Opting for a loan with a lower down payment means you’ll likely have to pay for private mortgage insurance (PMI), which safeguards the mortgage company in the event of default.
Six Reasons to Avoid Private Mortgage Insurance (PMI)
1. Cost
Over the mortgage’s lifespan, PMI costs can add up significantly, typically ranging between 0.5% to 1% of the total loan annually. These costs vary based on factors like credit score and loan-to-value ratio.
2. Not Deductible
Previously, PMI was tax-deductible but changes in legislation have eliminated this deduction, impacting your overall financial situation.
3. Your Heirs Do Not Benefit
PMI only benefits the lender and not your heirs, highlighting the need for separate insurance coverage to protect your loved ones.
4. Lost Investing Opportunity
Paying PMI means missing out on potential investment returns, as the money could have been utilized for profitable investments instead.
5. Difficult to Cancel
Canceling PMI can be a cumbersome process, involving various requirements and potentially lengthy wait times.
6. Payment Is Ongoing
Some lenders mandate ongoing PMI payments even after reaching the 20% equity threshold, highlighting the long-term commitment involved.
How to Avoid Paying PMI
One method to avoid PMI is by utilizing a piggyback mortgage, which involves taking two loans to cover the down payment without the need for PMI. Understanding the risks and terms associated with piggyback loans is crucial.
What Is a Piggyback Mortgage?
By utilizing a piggyback mortgage, homebuyers can evade PMI by securing two mortgages instead of one, with distinct interest rates.
Can You Remove PMI on FHA Loans?
If PMI is included in your FHA loan closed after a certain date, removing it may require paying off the loan or refinancing.
The Bottom Line
PMI can be a costly addition to your mortgage. Waiting to accumulate a larger down payment or exploring more affordable housing options might be more financially prudent. Seek advice from a financial advisor or mortgage professional to navigate your home purchasing decisions effectively.