#1: It’s expensive. Private mortgage insurance adds up quickly and it usually costs between 0.5% to 1% of the entire loan amount each year. Depending on the size of your home loan, you could potentially pay up to a couple of hundred dollars per month on this type of insurance, and that computes to a lot of extra dollars over the course of your loan. Homeowner’s the pay private mortgage insurance need to do so until the equity in the home reaches 20%. This could take years!
#2: It doesn’t reap any rewards. Just because you’re paying insurance, doesn’t mean you can expect to designate anything to any heirs or beneficiaries in the event of a death. PMI simply helps no one except the mortgage lender and has no monetary benefits to you or your family that may be left behind in the event of your death.
#3: It can be difficult to cancel. Once homeowners have reached the 20% equity threshold, they are qualified to have the PMI cancelled. However, many times it can be difficult to cancel, causing a hassle for many homeowners. It’s not common to see financial institutions that require homeowners to write a letter and include a formal appraisal to cancel the PMI.
How can you avoid PMI?
The first step is to come to the table with a solid 20% down payment (or more) on the home that you’re planning to buy. If that isn’t an option, private mortgage insurance can oftentimes be paid up front. So, instead of working the cost into your monthly budget, some lenders will allow homeowners to make the payment in cash at the time the mortgage is initially written up.
It’s very beneficial to save up enough money to come up with the full 20% down payment or pay for PMI in full, simply because over time, private mortgage insurance is very expensive. Unless you think the home that you’re buying will gain 20% equity in the first year, it makes sense to be patient and save up a little longer for a bigger down payment.
If you’ve saved your down payment and you’re ready to make the step of buying the home of your dreams, we can help get your home building process started. We’re currently hard at work building homes in the Timbercrest neighborhood and we’re ready to talk to you!
Disclaimer: Alder Fine Homes is not a financial lending institution. All mortgage questions should be directed to a mortgage lender. We are happy to recommend lenders, but requirements change constantly, so talk to a mortgage professional.