Why Should You Avoid Private Mortgage Insurance?
The first moment when you realize that buying a property is a big thing is when you see that you need at least 20% of the value of the home so that you can offer it as down payment. Unfortunately, most people do not have that money. If that is the case, the lender will force you to take out PMI (private mortgage insurance). This may seem like a great deal since you are not affected much but there are reasons why you should avoid this insurance. Here are the most important reasons to remember:
Costs
PMI usually costs you around 1% of the loan amount on annual basis. This basically means that you end up paying $2,000 per year for a $200,000 loan. Think about the repayment period of the entire loan and you would instantly realize how much that amount would be.
These Contracts Are Not Always Tax Deductible
Most PMI contracts are tax deductible under specific situations. However, when those specifics are not met, you will not actually know about it. Make sure that you think about this before you actually sign your contracts.
Family Members Do Not Get Anything
When thinking about insurance, most people end up thinking that in the event something bad happens, compensation is offered. That is not actually the case. Only the lending institution will be the beneficiary and proceeds are paid to the lender, not to your heirs.
You Cannot Cancel The Contract
Once you agree to PMI, you cannot stop until the conditions are met. However, in most cases homeowners will stop paying when equity goes as high as 20 percent. The huge problem is that some of the PMI contracts can only be stopped in the event that the borrower drafts a letter in which there is a request to cancel the insurance. Formal home appraisal is also needed. Based on lender, this process can take a really long time.
Designated Period Of Time
There are some lenders that will force the homeowner to pay the PMI fees for a strict number of years. Even if equity goes over 20 percent, the insurance still has to be paid. Make sure that you look at the fine print since you want to know everything about the contract you are about to sign.
Avoiding PMI
There are cases in which PMI can be avoided. This is possible through the piggy-back mortgage. It is an option that you have to consider. The amount that you cannot add for the down payment would be covered in a different way, with a piggyback second loan being taken out in order to cover the amount that is not available. You basically split the loans so you can deduct interests and completely avoid private mortgage insurance.
