Buying a home often comes with one major obstacle: saving up enough money to put down a sufficient amount for the required down payment.
The amount you are able to put down on a traditional mortgage will determine whether you’ll need to buy private mortgage insurance as well.
Instead of protecting you, this type of insurance is meant to protect the lender that helped you purchase a home, and is commonly sold to those home buyers who can’t afford the typical 20 percent down payment.
What is private mortgage insurance?
Private mortgage insurance (PMI) is a form of insurance which traditional lenders often require in case homebuyers aren’t able to put down the full 20 percent of the house’s purchase price, and is designed to protect lenders in case homeowners default on their loans.
While PMI doesn’t offer protection from foreclosure to homeowners, it does allow buyers to become homeowners sooner, even if they can’t currently afford a 20 percent down payment.
If your lender concludes that you’ll have to buy private mortgage insurance, they will contact an insurance provider, and should provide you with the full terms of your insurance plan before closing on the mortgage.
Generally, PMI can be removed from your mortgage after you’ve reached a 20 percent equity, whether through rising home values or paying off your loan balance.
How much does it cost?
According to the Urban Institute, the average rates for PMI premiums are between 0.58 and 1.86 percent of the original loan amount.
This usually means homeowners would pay between $30 and $70 per each $100,000 borrowed every month. However, the rate often depends on two important factors.
Your loan-to-value ratio (LTV) is often included in the calculation, meaning that the percentage you put down for a home impacts the amount you pay for PMI.
The smaller the down payment, the bigger the assumed risk, and the higher the PMI payments.
Similarly, your credit score and history could significantly impact the cost of PMI, with higher scores leading to smaller monthly payments.
How to stop PMI payments?
In most cases, PMI is a straightforward insurance that has been transparently described to the customer, allowing them to stop payments though usual processes such as building equity in a home, getting the home reappraised, or refinancing a mortgage.
However, this type of insurance can also be sold to consumers without disclosure, as a form of ‘junk’ insurance.
In case you have been sold PMI unwittingly, and have been making regular payments without explicit consent, the best course of action might be to request an insurance refund with the help of a claims specialist.
Such an expert will be able to check your contract and make a claim seeking appropriate compensation for your junk insurance troubles.
Is private mortgage insurance tax deductible?
If you haven’t been able to stop your private mortgage insurance payments, you might find comfort in knowing that PMI is currently tax deductible.
On your tax return, the sum paid for PMI is treated as mortgage interest, and can be claimed as long as your contract was issued after 2006.
While this benefit is available this tax year and will likely continue into the next one, keep in mind that it starts to phase out once your adjusted gross income has reached $100,000.
To that end, you should determine whether opting for the standard deduction might be a better solution than itemizing your deductions and including private mortgage insurance.
Are there any advantages to PMI?
The one big benefit that is always contributed to PMI is the ability to purchase a home sooner, without needing to save money for a 20 percent down payment.
This can be of great help, especially for first-time homeowners who might be able to buy a home sooner, build equity more quickly, and expand their net worth.
However, this aspect might only be beneficial for those homeowners who live in areas where house prices rise at a higher percentage compared to their PMI payments, providing them with a good return on investments.
But as home prices continue to drop in certain areas, and PMI continues to be sold as junk insurance, it seems like most homebuyers won’t see much value in this type of insurance.
While private mortgage insurance might allow you to become a homeowner sooner, it will significantly add to your regular mortgage expenses as well.
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For this reason, it’s best to see whether PMI would help or hinder your real estate goals before purchasing a home.