October 6, 2022 | Sexton Real Estate Group
Private Mortgage Insurance, or PMI, is a type of insurance that mortgage lenders require from some home buyers who obtain loans with less than a 20% down payment. In this post, we’ll explore the pros and cons of PMI insurance to help you decide if it’s the right choice for you.
The Pros Of PMI Insurance
1. It Allows You to Purchase a Home With a Smaller Down Payment.
The most obvious advantage of private mortgage insurance (PMI) is that it allows home buyers to purchase a property with a smaller down payment. For many home buyers, this is the key factor that allows them to move forward with their purchase. Without PMI insurance, they would have to wait until they had saved up a larger down payment, which could take years. With PMI insurance, they can buy their dream home sooner and begin building equity right away.
2. It Helps You Build Equity Faster.
There are several advantages to having PMI insurance on your home loan. One of the biggest benefits is that it helps you build equity in your home faster. With each monthly payment, you’ll be paying more towards your principal balance. As a result, you’ll pay off your loan quicker and build equity at a faster rate. This can be a huge benefit if you ever need to sell your home or take out a home equity loan. having built up a significant amount of equity, you’ll have more bargaining power and options available to you. In addition, building equity can help you build wealth over time and provide financial security in retirement. For all these reasons, PMI insurance is well worth the extra cost each month.
3. It May Help You Qualify for a Lower Interest Rate.
Another advantage of PMI insurance is that it may help you qualify for a lower interest rate on your home loan. Mortgage lenders typically offer lower interest rates to borrowers who make a larger down payment because it represents less risk to the lender. However, if you have PMI insurance, the lender may view your loan as being just as low-risk as a loan with a larger down payment. As a result, you may be able to qualify for a lower interest rate, which can save you money over the life of your loan.
The Cons Of PMI Insurance
1. It Increases Your Monthly Mortgage Payment.
The biggest disadvantage of PMI insurance is that it will increase your monthly mortgage payment. The amount you pay will depend on the size of your down payment, but it can add up to several hundred dollars extra each month. For some home buyers, this may make their dream home out of reach. It’s important to factor in the cost of PMI insurance when you’re budgeting for your new home.
2. It Takes Years to Cancel.
It can take a while to get rid of PMI, even after you’ve reached 20% equity in your home. For one thing, you have to contact your lender and request that they cancel your policy. Depending on the lender, this process can take several months or even years. In the meantime, you’ll still be required to pay that additional premium each month. That’s why it’s important to plan and factor in the cost of PMI when you’re budgeting for your new home. That way, you won’t be caught off guard by the extra expense later on. With a little planning, you can avoid paying PMI for longer than necessary.
3 . It Doesn’t Cover Your Entire Loan.
PMI only protects the lender, not the borrower. So if you default on your loan and the property goes into foreclosure, the lender will be reimbursed for their loss up to the amount of your PMI policy. However, you will still be responsible for any remaining balance on your loan. In other words, PMI won’t save you from foreclosure if you can’t make your mortgage payments.
4. It’s Not Available on All Loans.
PMI insurance is not available on all types of loans. For example, it’s not typically required on government-backed loans like FHA loans or VA loans. In addition, some lenders may not offer PMI insurance on their loans. So if you’re set on having PMI insurance, you’ll need to shop around to find a lender that offers it.
Private mortgage insurance has its pros and cons, but ultimately it’s a personal decision whether or not to pay for it. Be sure to weigh all the factors before deciding so that you can make the best choice for your financial situation.
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