The Good and the Bad of PMI
Planning to buy a home this year? For most people, this is the biggest financial decision in their life. But you already know this, right? So does everyone else, but despite this, so many homeowners we know, actually had to pay much larger amounts than what they expected. Though this can happen with anyone, it is almost often the case with people who require private mortgage insurance or PMI for their loans.
A study, conducted by a financial agency reveals that over 65% of people who had to bear a PMI, also had to bear a monthly payment that was much higher than what they expected.
When do you get a PMI on your loan? This happens when the lender has to give you an amount that is greater than 80% of the value of the home which you are buying. In other words, this means that your down payment is less than 20%. In such a case, insurance is required so that the lender is protected against any circumstances in which you may default on the loan. PMI may be beneficial for you; if you agree to it lenders will accept a down payment of less than 20%.
The only good thing about PMI is that once you obtain 20% equity in your home, you can request your lender to cancel it. If the equity in your home crosses 22%, your lender will automatically do this.
If you are signing up for an FHA loan, then your down payment can be as low as 3.5%. However, in this case, the insurance is for the entire loan term.
Considering people who became homeowners in the past two years, 35% of them said PMI influenced their buying decision. In the age group between 18 and 34 years, 20% had a PMI on their loans. For the age group between 35 to 54 years, 37% people had it. Among people older than 54 years, 23% people had to bear PMI.
The average cost of PMI is around $100 a month. It may be beneficial for you in the sense you have to pay a reduced down payment, but you cannot ignore the fact that it adds up to your costs.