When you’re making the big commitment of purchasing a house, we know that you’re thinking about the number of rooms, if any renovations need to be made, and what the neighborhood looks like. However, as we mentioned in a previous blog post, one of the biggest mistakes that many first-time homebuyers make is not thinking about what they can actually afford before beginning their house hunt. This may seem like a no-brainer to some families, but if you start seeing the letters “PMI” pop up, you may want to take a closer look at what they mean.
What is a PMI?
PMI stands for Private Mortgage Insurance, and what that really means is that if you’re unable to put down at least 20% in a down payment on your new home, then a fee (i.e. PMI) will be added to your monthly mortgage payments.
This fee is basically “protecting” the lender in the event that you (the borrower) wouldn’t be able to pay your mortgage. PMI is also required when refinancing a home with less than 20% equity. There are other options—such as taking out two mortgages—that may help you get out of the 20% rule, but that depends on the bank, your credit score/history, and the cost of the house.
Simply put: PMI mortgage is insurance for the lender that you (the borrower/new homeowner) have to pay if you can’t afford to put down at least 20% in a down payment.
Why Should I Avoid It?
- Perhaps the biggest reason why you should avoid a PMI is because it’s really just wasted money. If you can wait until you have 20% down payment or consider a less-expensive home, then you won’t have to spend any money on this lender insurance.
- It can be pretty expensive, especially for first-time homebuyers. PMI can be anywhere from .3 to 1.5% of your original loan per year, but it depends on the size of the down payment and your credit score. As Zillow and Investopedia point out, if the median home price is about $205,000 and we’re assuming that you’re paying a 1% PMI, then you’re looking at paying an additional $200 per month.
- There are a few hoops that you have to jump through in order to cancel a PMI. When your equity reaches 20%, then you no longer have to pay. The hoops come in the form of all the steps required to formally and officially cancel the monthly payments, which (unfortunately) could take several months, during which you’re still having to pay PMI.
- Depending on your income, PMI payments may not be tax deductible. In 2017, PMI mortgage payments were deductible “if the married taxpayer’s adjusted gross income was less than $109,000.” However, this provision has been debated recently and may not be offered to anyone in the future.
- Some lenders require the homeowner to sign a contract that says you have to pay PMI for a certain period of time, regardless of other factors (like meeting the 20% equity requirement to cancel payments). This is a great example of why thoroughly reading contracts before you sign them is so important (as is speaking with your bank and realtor about all the details before making any commitments).
If you have more questions about PMI mortgages or understand them and want to start your house hunting, then give Maureen Bryant a call!