If you are keen to buying yourself a home anytime soon, make sure that you make enough savings for this purpose because you need to make at least 20% down payment for a decent house. In the event that this is not a likely scenario for you, your private lender may necessitate that you sign up a private mortgage insurance before he will allow you to finally sign off on the loan. The main purpose of the insurance is to solely protect the interest of the mortgage company in the event that a default in your payment occurs.
To many of us, our first general impression on a private mortgage insurance is that it affords us a great way to buy and acquire a house without having the need to save a significant amount of money for down payment. For new and first time homebuyers, this may easily qualify as the best option for them. If you are a first-time homebuyer, there are instances that I would discourage you from paying or even availing this kind of mortgage insurance. Let me tackle these common issues with you so you know when you are not supposed to get a private mortgage insurance, and why so.
Cost
Not Deductible
If you are a married taxpayer, earning an estimated amount of $110,000 per year, you can have your private mortgage tax deductible. While the threshold for couples who wish to file separately is $55,000. This signifies that a lot of dual-income families with combined income that goes beyond the threshold amount are in the end left ignored. While word has it that there would be an increase on the “income cap”, there is no certainty yet that this would actually materialize. A great number of homeowners today, specifically those that are beyond the threshold will be in a better position should they decide to make a larger down payment instead. The mere fact that the interest on the loan can be tax deductible will give them a much need peace of mind.
An Heir May Get Nothing Out of It
The general assumption among many of us whenever we hear the word “insurance” is that at least a member of our immediate family would be receiving a monetary benefit in the event of our sudden death. I would like to break this notion because this is not always true. The sole beneficiary of such policies would always be the lending institution. The proceeds are directly received by the lender and not by the heirs first. Should you want to prioritize to leave your immediate family members a significant amount of money after your death, you may want to consider getting a separate insurance policy instead for that purpose. So many people have fallen prey into thinking that a PMI would be of help to them in some way, but really you can only get this from your mortgage provider.
Giving Money Away
If you are a homebuyer and you have put down less than 20% of the sale cost, you will be necessitated to make payments for a mortgage insurance until such time that your homes' total equity reaches 20%. This may take you about several years to complete, which signifies that the homeowner in its most literal sense is giving away huge amounts of hard earned money.
Difficult to Cancel
I did mention about this earlier but the moment in time that the homeowner’s equity goes beyond 20%, he may not be necessitated anymore to pay for or avail a PMI (private mortgage insurance). But trying to get rid of the homeowner’s burden about his monthly payments is not going to be as easy as not sending the PMI payments at all. The majority of the private lenders would require the homeowners to make a letter of request to formally ask for the PMI cancellation. The same procedure is to be done to appraise the home prior to its cancellation. Depending upon the circumstances of the private lender, the whole process could take several months to complete.
Continuing Payment
Another common issue that I think is worth giving some attention here is that there are a few private lenders who would require you to have a PMI at least only for a specified amount of time. This renders the homeowners to still be obligated to pay for the mortgage insurance even though he has met the threshold of 20%. I suggest that you check this out with your own private lender and inspect the fine print for your PMI contract and get the chance to know more about its specifics.
What Are Your Chances of Avoiding PMI?
If you will take out a second loan to accommodate the additional amount that you will need, you may be able to avoid a PMI insurance. As a form of creative financing, the loan amounts that you can possibly get could go between 80/15/5 or 80/20. Five is for the down payment with which you were able to save up on your own. If you would like to avail this instead, it is crucial that you add the costs for both plans if you are interested in determining the exact amount of money that you can borrow.
And if you are qualified as a credit risk, you may still be necessitated to pay higher amounts of interest rate. This renders the PMI as some kind of a negative thing but that would actually depend on what kind of loan you have. There is a big chance that you might end up saving a lot of money if your PMI is on a lower interest loan as opposed to making payment for higher interest rates during the entire lifespan of the loan.
Remember if you are interested in availing a loan, make it sure that you are able to see the entire picture first. This way you can never be wrong in your choices because what you will have is nothing less than an informed decision.
There is no other better way to avoid a PMI than to save adequate amount of money first prior to making a decision to buy a house or a property. Truth is this may take a while to fulfill and it may drive you to an unwanted state of frustration if you feel pressured that you need to immediately buy a house anytime soon. This is especially true if you are in a difficult financial circumstance at the moment. But you can actually purchase a nicer home provided that the equity in your home would be added. If in the near future you will have a pressing need to move to another location, it will help ease out the pressure it would have on you. It will be significantly helpful in keeping your mortgage from getting messed up. Generally speaking, I would assert that this will help make the house acquisition process a lot easier.
Can Your PMI Shield You In Case You Fail to Make Payment in Timely Manner
The general notion among many homemakers today is that if they have a PMI or private mortgage insurance, it will help protect them should they fail to make it to their payment schedule or if they default on their payments. Unfortunately, this is not so. The insurance policy is actually intended for the bank, with which you are necessitated to make payments to. There is a big chance though that you could lose ownership of your home in the event that you stop making payments. If you are the rightful homeowner, it is crucial that you have a clear understanding of this. For as long as you have a mortgage for your home, you should also have a corresponding insurance for your home. It is your bank that requires all that, but for your best interest you should still have it even after your home has been paid off already.
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