Many people fail to understand the concept of Private Mortgage Insurance (PMI). Due to misconceptions, many homeowners are frightened of it. Fortunately, PMI is not a horrifying concept and is a great friend for those who plan to purchase a home without paying a 20% down payment. In this blog, we will bust four myths about PMI.
What is Private Mortgage Insurance?
Many people don’t have any idea about private mortgage insurance. They know mainly about the misconceptions and believe in them.
The concept of the insurance is to safeguard the mortgagee’s interest if the loanee defaults on the mortgage. Not everyone has to pay PMI. Only those with less than 20% deposit must pay for this insurance.
4 Common Misconceptions About Private Mortgage Insurance
Now that you know what PMI is, let’s understand the misconceptions surrounding the term.
1. PMI is Permanent
Commonly, homeowners believe PMI will stick with them forever. However, once you pay off the loan and build up some equity against the house, you can ask the lender to remove the PMI.
Options of Terminating PMI
Lenders usually discontinue PMI when your mortgage balance hits 78%. You can also cancel PMI once your equity reaches 20%. Make sure to contact the lender and ask for cancellation.
2. PMI is Extremely Expensive
It’s a myth that PMI will drill a hole in your pocket. There is no truth behind it.
The Cost Involved
Usually, you need to pay 0.3 to 1.5% of the mortgage amount each year as PMI. It means you must pay an additional $600 to $3,000 against a mortgage loan of $200,000.
3. PMI Benefits the Lender
Another misconception is that PMI only favors the lender. But the reality is that it also benefits the borrower.
Benefit for Lender
PMI protects the lender from the default risk. Many borrowers fail to pay off their mortgage on time, resulting in default and filing for bankruptcy. This insurance protects the lender from losing the money.
Benefit for Borrower
With PMI, the borrower can buy the house with a lower down payment. It will take years to save up to the recommended 20%, but with PMI, the borrower can pay 3% to 5% and qualify to purchase a house.
4. You Can’t Avoid PMI with Less Than 20% Down Payment
You must pay PMI if you have less than 20% down payment to deposit. However, there are alternatives available as well.
Lender Paid Private Mortgage Insurance
With LPMI, the lender pays out the amount of PMIs while charging slightly higher mortgage interest rates.
Piggyback Loans
You can also opt for piggyback loans or second mortgages—these aid in minimizing part of the required amount and PMI percentage.
Veterans Loan
There is a VA loan, especially for veterans. This type of loan doesn’t need insurance; hence, there is no PMI.
Conclusion
Many homeowners get confused with private mortgage insurance. However, knowing the common misconceptions is essential to avoid confusion and make smarter mortgage choices. Remember that PMI is an asset that facilitates your dream of owning a house. Appropriate planning and supervision could minimize the consequences on your family.
