Q: I’m considering private mortgage insurance (PMI) on the new home I want to buy. Is this a good idea, and do I need PMI?
A: PMI is an extra fee that you pay every month with your mortgage. It is designed to keep the lender safe if you default on the home loan. You can save hundreds of dollars a month if you can avoid adding PMI to your mortgage loan.
How to avoid private mortgage insurance.
You can avoid PMI by having 20% or more for your down payment. Lenders see borrowers who can’t put down 20% or more as risky, so they add the insurance.
You may also be able to find government or other agencies that can help with your down payment so that PMI won’t be required. Research federal, state, and local programs. Some programs are designed for those in specific industries, such as farmers, veterans, firefighters, and police officers, so check into agencies that also benefit your industry.
Understand the lack of benefits.
It’s important to remember that having PMI doesn’t help you. It’s created to guard the lender and not you.
This insurance doesn’t keep you safe, and it doesn’t reduce the balance of your loan. Private mortgage insurance is simply an extra fee you have to pay that doesn’t benefit you or your family. It’s also not tax deductible.
Understand the removal process.
Once you get PMI, getting rid of it is not easy.
Lenders may still view you as risky, making the PMI removal process a nightmare. Some lenders don’t even provide the option of eliminating private mortgage insurance, so you may be stuck with it for the duration of the mortgage loan.
You can avoid private mortgage insurance and save money on monthly mortgage payments. Take the time necessary to save 20% before shopping for a mortgage, or find an agency that helps with your down payment without adding PMI. Avoiding PMI takes effort, but it’s well worth your time.