Are you trying to buy a home but find that you don’t have enough money to make a 20% down payment? Today this isn’t mandatory in order to buy a home. You can even secure a conventional loan with as little as 5% down. If you do this, you will pay Private Mortgage Insurance or PMI. This insurance protects the lender should you stop making your mortgage payments and go into foreclosure.
It may sound like just another way to make your mortgage payment expensive, but there are pros and cons to this insurance policy.
The Pros of Private Mortgage Insurance
Even though PMI adds to your monthly expenses, it does have its benefits:
- You can put less money down – You don’t have to worry about scrounging up a 20% down payment. On a $100,000 loan, that’s $20,000. That’s no small chunk change. Obviously, the higher the loan amount, the more you would need. If you pay Private Mortgage Insurance on the loan, you can put down a much lower down payment and buy a home sooner.
- Lenders may be more lenient – Having PMI in place lets lenders know that they have a guarantee of repayment should you default. This could allow lenders to overlook small flaws in your mortgage application. If you have a risky factor, such as a higher DTI combined with a low down payment, many lenders would turn you away. With PMI, though, some lenders may reconsider.
- You don’t pay it forever – Unlike FHA loans, you don’t pay PMI for the life of the loan. As soon as you owe less than 80% of the home’s value, you can request cancellation of the insurance. In other words, for a temporarily inflated mortgage payment, you could get the approval you need and cancel the insurance in the future.
The Cons of Private Mortgage Insurance
Of course, there are a few negatives that come along with paying Private Mortgage Insurance:
- Your mortgage payment will be higher – The amount you pay for PMI depends on the loan’s LTV and your credit score. The higher your LTV and the lower your credit score, the more you will pay. It could cost you as much as a few hundred dollars extra depending on your situation.
- The insurance doesn’t cover you – You pay the premiums on the Private Mortgage Insurance, but the coverage is only for the lender. If you cannot make your payments, the insurance covers the mortgage company, leaving you without a home and the money you paid for the premiums.
- You can’t deduct the expense on your taxes – Starting next year, when you file your 2018 taxes, you cannot deduct PMI payments. They used to be tax deductible, which made the expense slightly lower for homeowners unable to put down 20% on a home.
Only you will know if Private Mortgage Insurance is right for you. Just as you shop around for a lender with the best interest rate and closing costs, shop for a lender with the lowest PMI costs. You can help the situation by putting more money down on the home or improving your credit score. You can even get rid of the insurance sooner than you anticipated by paying your principal balance down faster than scheduled.