If you are considering buying a home, one of the best things you can do is save up money enough for a 20 percent down payment. If you are unable to arrange this money for down payment, chances are that your lender will require you to secure private mortgage insurance (PMI) before you receive the loan. This insurance protects the lender against any potential default on the loan from your end.
High Cost of PMI *
PMI will cost you anywhere between 0.5 and 1 percent of your total loan amount every year. This cost becomes significant when you are counting every penny in your budget to ensure you can pay your loan installments smoothly and when you have other responsibilities (food, car, energy, and so on).
Tax Conditions
PMI contracts are not tax deductible in every case. For a dual income family with a combined income above the threshold level of $110,000, there is no tax deduction available.
No Monetary Compensation
Some homeowners carry a mistake impression that PMI may result in some kind of monetary compensation for their family members if they die. However, the fact is that only the lender is the sole beneficiary of this policy, and the proceeds are paid directly to the lender.
Direct Loss of Money
When a homebuyer takes a loan with PMI, he or she is required to pay the mortgage insurance until the home equity reaches 20 percent. If the loan amount is large, or the installments are smaller, it could take years before this limit of 20 percent is reached. That amounts to a direct loss of money which will simply go away regarding the insurance premiums to the benefit of the lender.
Fixed Contract
In some cases, the lender may require the homebuyer to maintain a PMI contract for a certain fixed period of time. In such case, even when the threshold limit of 20 percent home equity is reached, the borrower may still be under an obligation to continue paying for the mortgage insurance until the expiry of the contract.
Advantages of PMI
For homebuyers who have no way to make the minimum 20 percent down payment may have to accept the condition of PMI to obtain the loan. For a family that itemizes its tax deductions and has a combined earning of less than $110,000 per annum, the PMI will offer tax deduction. That could result in a significant saving for the borrower.
Furthermore, if the borrower does not wish to include the PMI premiums in his or her monthly budget, it may be possible to make the PMI payments up front. This may even open the door towards a discount from the lender.
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Jennifer A. Steele is licensed Real Estate agent, located in Indiana, PA. She has worked in the Real Estate business for over 5 years. She specializes in buyer and seller agency.
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