Purchase of a home usually means that you make the payment of at least 20% of the price of the house initially and the rest paid periodically. When you consider the fact that a single family house is sold for not less than $200,000, you should have saved some $40,000. This may not always be the case. PMI comes to the rescue to those who go for it.
Mention private mortgage insurance and many people react with sniggering. That is because not everyone can take extra spending in their stride and be done with it. Especially, when you cannot avoid it. However, you may not be in a situation to avoid it. If you would rather buy the house you are bent on having but do not have the 20% down payment, Private Mortgage Insurance (PMI) can come to aid you.
What is PMI?
Conventional loans do not generally have a mortgage insurance clause in them if you can pay 20% of the price for the house. PMI is primarily used to protect the direct lender when you default on your payment to him. PMI is mostly included in monthly mortgage payments. You might opt to have insurance included with mortgage in which case, you do not have to pay additional closing costs. You can also make the payments yourself monthly, instead of your financial institution or the bank. You can pay the first premium with closing costs.
Benefits of PMI
As we said earlier, you’re not having enough money to pay for the 20% down payment should not standing in the way of having your dream home. PMI can help acquire the house. Mortgage insurance can finance your home and you can get an expensive home for a smaller down payment. Some people may be apprehensive about getting into a way of life that will always have mortgage payment in it. Not necessarily so. There are some loans, in fact, wherein you can cancel PMI if balance is 78% of original value. In the event, the monthly mortgage payment will be reduced by doing away with insurance payment.
You can opt for Lender Paid Mortgage Insurance (LPMI) to leverage PMI better. This calls for a higher interest to be paid by the borrower. The lender, on his part, has to waive the private mortgage insurance. In case you have a good credit score, this is a great way to go about borrowing. However, you must consult a home loan expert before you make a decision.
Rent VS Insurance Payment
Mortgage insurance is not inexpensive and you had better take the decision to take one after weighing the pros and cons of it all. On one hand, you might be making monthly insurance for a house mortgage for years but if you want to save 15% additionally for a down payment, it will, by all accounts, take a long time. On the other hand, if you go for mortgage insurance, you will rather be staying in your own house rather than living in a rented place.