Featured News 2012 Should You Get Private Mortgage Insurance?

Should You Get Private Mortgage Insurance?

When you are trying to buy a house, you will need to place a down payment on the property. This is usually 20 percent of the total cost of the house. The rest of the house will be covered by a mortgage that you will slowly pay off over the years until the home is officially and totally yours. If you can't afford a down payment, there is another option. Your lender will probably tell you that you must secure private mortgage insurance before signing off the loan. This insurance is a benefit to the company, because it gives them protection in case you default on the note.

While private mortgage insurance may seem like a good idea, it isn't always the best option. There are times when it is your only choice, but purchase PMI with caution. There may be an even better way for you to get home that you want without paying that down payment you can't afford. PMI is often a turn off because of the cost. Normally, this insurance costs between 0.5% and 1% of the entire loan amount on a yearly basis. This means that people can spend about $200 a month on PMI, which could go to other parts of your budget.

PMI may not be deductible, which is another reason you should be very careful when purchasing. According to one investment source, PMI contracts are only deductible if married couples earn less than $110,000 per year. If you are single, or filed separate from your spouse, then you must make under $55,000 a year. If you make a down payment, the interest on the loan will be deductible. You should be very careful before choosing PMI over a down payment if you are able to do both.

Also, your heirs won't get anything if you decide to purchase PMI. The lending institution is the only beneficiary of this policy, so your children or spouse would not get any of the money when you pass away. That is in part because the proceeds for a PMI are paid directly to the lender. You'll have to obtain a separate insurance policy if you want your heirs to benefit from it in the future. When you purchase PMI, you commit to pay mortgage insurance until the total equity of your home reaches 20%. This takes years to reach. A lot of money that could be invested into better money-making strategies is instead given to the mortgage company.

Until the homeowner's total equity tops 20%, PMI is almost impossible to cancel. Eliminating the monthly burden isn't as easy as sending in a payment. Instead, the lenders often require a homeowner to draft a letter requesting that they cancel the PMI. The mortgage company will probably want to see a formal appraisal of the home before it is canceled. This can take several months, and in some cases you may not even have your request granted. Some lenders require a homeowner to maintain the PMI contract for a designated period of time. This means that even when you reach your 20% limit, you may still need to keep paying for PMI. This can be incredibly irritating.

If your mortgage company has asked you to purchase PMI, then you may want to look into alternatives first. Often you can avoid PMI by using a piggy-back mortgage or a similar loan arrangement. In the end, PMI is not entirely bad. There are times that a couple can even generate savings with a PMI, depending on your income and the cost of your home. Often the mortgage insurance can be paid up front, and sometimes the insurance makes your mortgage easier to pay down. Talk to a real estate attorney and your lender about options.

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