Why and how to avoid purchasing a Private Mortgage Insurance policy
Are you not able to make at least 20% down payment on your home? In most cases, your lender will require you to purchase a Primate Mortgage Insurance
(PMI) if your down payment on a home is less than 20% of the sale price or the appraised value of the property. The purpose of this home loan insurance is that it protects the lender if you default on loan repayment.
Apart from you purchasing a PMI (known as a Borrower-paid PMI), your lender can also buy a Private Mortgage Insurance (referred to as a Lender-paid PMI) and include the premium cost in your monthly home loan payments. Usually, a lender purchases a PMI in case of a high loan-to-value mortgage.
Why to avoid PMI
It is always better to make 20% down payment on a home and avoid purchasing a Private Mortgage Insurance policy. Go through the following lines to know why to avoid purchasing a PMI while taking out a home loan.
- Pay more in the long run: You can end up paying more in the long run by purchasing this home loan insurance. This is because it might take years to build up at least 20% equity on your purchased property. So, you actually give away a huge amount by purchasing a PMI.
- Definite time period of the contract: Usually, you cannot cancel a PMI contract within a stipulated time even if you’re able to build up sufficient equity on your home. So, even if you need to purchase a PMI, carefully review the terms and conditions of the contract before signing the dotted line.
- It may take time to cancel a PMI: Even after you build up 20% equity on the property, it may take some time to cancel your PMI. This is because you may have to send a letter to your lender requesting him/her to cancel the PMI. Moreover, a formal appraisal may also be required in order to proceed with the request. Usually, the above mentioned procedures take time and you have to continue paying the insurance premium during the period.
How to avoid PMI
You can avoid purchasing a Private Mortgage Insurance by -
- Paying more interest on your home loan: You can opt for paying more interest on your mortgage loan if you’re unable to make 20% down payment on the home. In most cases, the lender waives off PMI if the borrower agrees to pay relatively high interest.
- Borrowing the required amount: You can borrow the required amount from your friends or family members and avoid buying this home loan insurance policy. However, while borrowing the amount, always get a written contract mentioning the terms and conditions of how you need to repay the amount. It will help you to avoid future misunderstanding with your friends or family.
Taking out an 80-10-10 loan can also help you to avoid purchasing a PMI. It is a loan program, wherein you need to pay 10% of the sale price and take out 2 home loans – one financing the 80% of the sale price and the other (or the second mortgage) financing the remaining 10%. However, it is very difficult to obtain such a home loan when the housing market is in crisis.
It can be concluded by saying that it is always better to save the required amount for the down payment instead of purchasing a home loan insurance policy. It is advisable that you assess your financial condition in order to know how much you can afford to pay for the down payment while purchasing a property. It will help you to avoid purchasing a Private Mortgage Insurance policy.