In order to qualify for a loan, many loan companies require buyers to accept PMI. This is private mortgage insurance, and it exists to protect the loan company from defaults. Even though a home buyer usually pays for it, it does not protect them.
It will not take away that borrowers responsibility for a loan, and it will not protect credit if a loan goes into default. Lenders usually will not quaify borrowers with ess than a 20% down payment unless they purchase PMI.
To be fair to loan companies, they are taking a lot more risk when they lend to people who do not have twenty percent to put down. The borrower is taking less of the risk of the home purchase, and he or she is putting more into the lap of a mortgage company.
It can be very tough for the lender to get back their investor if the borrower stops paying.
In addition, the type of borrower who can come up with a larger down payment may have more resources. Those people will be less likely to stop paying.
PMI is not always evil. Many home buyers accept it because they want a loan.
It is not always a bad option. Sometimes it may be the only way to qualify for a mortgage on a home that makes sense to buy. If your family income is under the IRS guidelines, PMI may provide a tax deduction. So the actual cost of this coverage will not be as much as the premium. You need to consider these factors when you sit down and figure out if a certain loan and home purchase is the right one for you.
But there are lots of reasons to avoid private mortgage insurance if you can.
Cost is the biggest reason to look for another option. The premium could be about 1% of your loan per year. This is simple to illustrate. For every $100,000 of your loan, you can pay $1,000 a year for PMI.
So if you consider monthly payments,. This is about an extra $80 added to your home payments. For a $250,000 loan, this is about $200 a month. This is a real cost that must be added to your cost of home ownership!
Look at how much harder it will be to budget for mortgage payments if you have to pay a couple more hundred dollars a month.
And of course, these payments mean that less of your check actually goes towards building up your equity. So it can take you longer to ever get to that 20% equity point where you can cancel the PMI!
But we understand that it can be a good decision, for some people, to buy a home even if they do not have 20% to put down. But you really need to look at your own individual situation. The mortgage crisis has demonstrated that may unhappy people did not plan for the true costs of owning their own home.
You will have your mortgage, home insurance, PMI, and more. are only the beginning. Now you will also be resposible for upkeep and repairs. And if your situation changes, you may need to sell your home quickly. If you do not have much equity in your house, it can be a lot harder.