Reasons to Avoid PMI, and How to Skip it

Private Mortgage Insurance doesn’t seem to be a costly expense, but it definitely adds up over the life of your loan. Commonly known as PMI, private mortgage insurance is an extra fee on top of your monthly mortgage payment as well as escrow and taxes. It’s an insurance that protects the lender in case the borrower defaults on the loan. Whoever gave you the loan is the entity handling the PMI. PMI doesn’t do a single thing for the homeowner other than cost you $100 a month. Here’s why and how you should avoid paying PMI.

You don’t have to pay PMI

PMI isn’t mandatory for all homeowners. Lenders charge PMI when borrowers finance more than a certain percentage of a home purchase, it’s usually less than 20%. It makes no difference what you look like on paper, this is the lenders duty to protect themselves. Usually when you reach around 80% equity, you can drop the PMI. Avoid having to pay PMI by putting down a bigger down payment, and expect to pay it if you put down less than 20%.

PMI mortgage insurance does nothing for you

Yes it’s true, you are basically throwing money away. This payment strictly protects the lender, it doesn’t go towards the equity of your home, and it can’t be recouped from the sale of the house. It’s not tax-deductible like your interest, and doesn’t affect your loan balance.  It’s simply a fee to pay if your home-loan-to-home-value ratio is less than 80%.

It’s difficult to get rid of

You build equity as you pay down the principal amount on your mortgage. Even if you financed more than 20% of the purchase price of your home, you should eventually pay down your loan, or your home will increase in value, so that you owe less than 80% of what your home is worth. When this happens, PMI drops off. It doesn’t always work this way because homeowners don’t know about it. Removing your PMI doesn’t just happen automatically; it happens through request. Sometimes a home appraisal is necessary before the lender will remove the PMI.

PMI isn’t tax deductible

Itemizing your deductions when you file your tax return allows you to take advantage of the interest you pay during the year. This is often the biggest gift to tax payers. This isn’t the case for PMI. They aren’t tax deductible, so shorting on your down payment and making it up later won’t work.

How to not pay PMI

The simplest way to avoid PMI is to put down at least 20%. Not only are you not paying into PMI during the life of the loan, it saves you mega bucks. You borrow less money, meaning you pay less interest, and you have more equity in your home right away.

Look into the different type of loans too. There are government-back loans, which don’t require PMI and could be a better option for you than the traditional loan. 

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