It’s your first home and you are beyond excited to finally purchase a property. The tip of your pen is anxious to write the check for three percent of the asking price as down payment when the loan officer informs you that Private Mortgage Insurance (PMI) is necessary to complete your agreement.
Quick PMI truth
Most lenders will not tell you that PMIs are assurances set in place to protect themselves. The premiums are similar to GAP auto insurance in that they cover the home in the instance of default. Private mortgage insurance guarantees the lender gets paid even if you fail to fulfill the financial terms of the contract. Such coverage does nothing to protect you in the instance of foreclosure.
How PMIs work
The premium amount for coverage is included in the amount owed and either paid in monthly installments or all at once. In the instance of upfront payment, you may or may not be entitled to a refund if you refinance or sell the property. Such is the reason that most buyers choose a monthly plan when paying PMI premiums.
Avoiding the extra expense
While it is true that PMIs offer some sort of peace of mind, at least to the lender, they are an additional expense that can be avoided. Making a higher down payment or improving your credit score before attempting to purchase a home can keep you away from conventional loans and, hence, unwanted insurance purchases. In addition, using an FHA loan allows you to put down three percent of the home’s value without having to pay extra for a premium that does nothing to protect you. Having twenty percent of the asking price always gets you away from the conventional loan and can lead to a lower interest rate.
You can always cancel a PMI once your home accumulates equity that is at least twenty percent of the property’s value. There is a way out even if you initially get stuck with an additional expense
Caymus Realty Solutions offers you an alternative for buying and selling homes in the Pittsburgh area. We pay cash for houses and offer a fair price to homeowners looking to sell, regardless of whether or not the home is in good condition. Learn more about our purchasing process here.
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