Private mortgage insurance can seem like a real pain in the neck. After all, who wants to pay extra money every month and not see any type of return on it? The unfortunate truth is that PMI is beneficial in many cases, especially with the state of today’s economy. PMI has its ups and downs but there are many benefits that potential homeowners often overlook.
Lower Down Payments Required
After the housing crisis and super slow economy, many people not only lost their homes, but all of their assets. Now that things are slowly recovering, these same people want to own a home again. The only problem is that they do not have a large amount of liquid assets. In the past, that would mean that a home would not be purchased. Today, more borrowers are leaning towards putting down a lower down payment and paying the PMI. In many circumstances this could mean putting down as little as 5 percent of the sales price down. On a $200,000 home, that would amount to $10,000. In the near future, conventional loans might even allow 3 percent down payments, making it even easier to get into a home. Suddenly that extra payment for PMI every month does not seem as bad.
Get into a Home Faster
Private mortgage insurance makes it possible for consumers to get into a home faster. If you are required to save enough money to be able to put down 20 percent of the sales price, it could be many years before you are able to own a home. For those that do not want to rent and really want to own a home, that might not seem like the ideal situation. For these people, paying PMI every month is not as bad as not getting into a home.
Get into a Bigger Home
Another large benefit of paying PMI is the ability to purchase a larger or more expensive home. If you are required to put down 20 percent on any home, you might be stuck purchasing a home that you really do not want. For example, let’s look at a home selling for $250,000. If you were required to put down 20 percent, you would need to save $50,000. On the other hand, if you were only required to put down 5 percent, you would need to save $12,500. That is a $37,500 difference; that’s a lot of money! If you are unable to come up with the $37,500 difference, you would be stuck looking at homes in a much lower price range – most likely homes that you would not even want to consider. Paying that monthly PMI suddenly does not seem so bad.
You Have Options with Private Mortgage Insurance Payments
The good news is that you can choose how you want to pay your private mortgage insurance premiums. Some lenders allow borrowers to pay the first year up front at closing. If you have the assets, then you will save a little money right away because the premium is slightly lower for a lump sum payment versus monthly payments. At the closing, your lender is obligated to let you know when you will hit 80 percent loan-to-value ratio, at which point you can opt out of PMI. It is important to understand that most lenders will not automatically stop collecting for PMI; you have to make a formal, written request to put an end to the mortgage insurance premiums being included in your mortgage payment.
Before you turn down the idea of paying private mortgage insurance, it is a good idea to learn about its benefits. Today many more people are opting to pay PMI just so that they can get into the house that they want. If you do end up paying PMI, you can always keep a close eye on the value of your home and notify the lender when it has increased enough to get you to 80 percent LTV. This scenario would require you to refinance and obtain a new appraisal, but it could work to your benefit if you could eliminate the PMI.Click to See the Latest Mortgage Rates»