When Do You Need Private Mortgage Insurance?
Private Mortgage Insurance (PMI) needs to be obtained from the lender in any case where the down payment is less than 20 percent of the sales price. It is not beneficial to you in any way whatsoever, but in case you are not able to repay the loan, its purpose is to protect the lender.
You need to pay charges for obtaining PMI and the amount to be paid depends on certain factors including lender, amount of down payment and the size of the loan. Generally it is around 0.5 percent of the loan amount.
Suppose you bought a home worth $200,000 but were not able to make a 20% down payment ($40,000). Instead you had only $20,000. Thus the loan amount comes out to be $180,000. Now, the PMI would be 0.5 percent of $180,000 i.e. .005 x $180,000= $900. Thus, you would be paying an additional annual charge of $900 or $75 per month.
How Long Do You Need to Pay for Private Mortgage Insurance?
The good thing is that you would only need to pay this extra charge until the equity in your home exceeds 20 percent. However, it can still take several years for you to reach this level of home equity and free yourself from the PMI.
This may happen more quickly in some economic times than in others. In a good economy your home will appreciate more quickly and your equity will reach 20 percent in much less time. Once you have reached this point, you would no longer be required to continue the private mortgage insurance policy.
You will, however, need to pay a few hundred dollars for an appraisal to determine the value of your home. The bank or mortgage company will want proof there has been a sufficient increase in value and that you now have the required 20 percent equity.
Stay Informed as to Your Home’s Current Value:
Be sure to check with your mortgage holder as to accepted appraisers in your area. Many lenders will often only accept appraisals from a specific list of the lender’s preferred appraisers. This is to prevent people from searching out an unethical appraiser and paying for an appraisal stating a higher appraised value.
Another important thing to note here is that unlike your mortgage, PMI is not tax deductible.
Once you no longer have to pay the PMI charges you will be saving $900 a year. As you can see, it is definitely to your advantage to stay informed of your home’s current value and to obtain an appraisal once you have reached 20 percent equity in your home.
One thing that comes to mind at this stage is that if you are not able make a 20 percent down payment, the additional PMI charges may put additional pressure on your finances as well.
Are There Alternatives to Paying PMI?
An alternative, in some cases, may be to agree to paying a higher interest rate until such time your home equity reaches 20 percent. Once the equity reaches to 20 percent, the interest rate is adjusted. In this case, the additional interest would also be tax deductible.
Another option is to take out a second mortgage. If you are putting 10% down.. your first mortgage will be for 80%.. and it may be possible to get a second mortgage loan for the remaining 10%.
The Interest on a second mortgage is higher than on the first mortgage.. but the total payment is normally still lower than paying for private mortgage insurance.
In this case.. the interest paid on the second mortgage is also deductible.