When it is necessary
If a home buyer cannot afford to make a large down payment, typically at least twenty percent, to purchase a home, purchasing PMI insurance allows the buyer to pay as little as five percent down. In certain cases, the buyer is allowed to purchase the home with no money down. For a lender who has bad credit, PMI insurance may be required even if the loan-to-value ratio is less than eighty percent. A foreclosure on a previous home may also prompt the lender to require PMI insurance be purchased. For borrowers with no prior foreclosures and for those who have good credit; there is no need to purchase PMI insurance if the loan-to-value ratio on a home is less than eighty percent.
How to avoid paying PMI mortgage insurance
PMI insurance is added into the mortgage payments when a house is financed and can make monthly mortgage payments significantly higher. There are a few ways to go about avoiding PMI insurance. By increasing the market value of a home, the homeowner can terminate PMI insurance once the equity falls below the required eighty percent loan-to-value ratio.
The homeowner can get an appraisal and present it to the lender showing the equity is below the required percentage. Making improvements to the home will also accomplish the same thing. Borrowers will just need to consider whether the price of making home improvements or having an appraisal is worth the premium they will save. Paying down the mortgage will also work to decrease the loan-to-value ratio if the homeowner is seeking to discontinue the PMI insurance.
The Homeowners Protection Act requires lenders to discontinue PMI insurance when the mortgage is at seventy-eight percent loan to value. However, if the borrower is behind on payments or if there is an additional lien on the property; PMI insurance may still be required.
Still another option is what is known as a piggy-back loan. This is normally an 80-10-10 combination loan and utilizes a home equity loan, a line or credit, or a second mortgage (with a 10% down payment). The interest on the loan is tax deductible and can help avoid the necessity of purchasing PMI insurance.
In response to the great number of home buyers who were seeking piggy-back loans, some lenders are now offering two additional loan options. The finance single premium option allows lenders to have the same lower payments as if they had purchased a piggy-back loan. There are also mortgage loans available called “No-PMI” loans. These loans have a higher interest rate. However, the homeowner does not have to pay the additional PMI insurance rate on the loan. The loan is still covered for PMI but the cost is being covered by the lender. Home buyers should be sure to discuss any of these available options before signing paperwork on their mortgage.
Advantages and disadvantages
The one real advantage of PMI mortgage insurance is that for many homeowners, it offers the ability for a lower down payment. With the inflated real estate market, it is often the only option many home owners have of obtaining an affordable down payment option and achieving their dream of home ownership. PMI insurance premiums are now tax deductible, as is mortgage interest. The itemized deduction for private mortgage insurance is for homeowners who earn up to $109,000 per year. The additional cost of PMI insurance also makes the mortgage payments higher. On the downside, a homeowner may find it difficult to get the mortgage balance down to eighty percent of the loan and end up paying PMI insurance for many years.
PMI mortgage insurance is often necessary if the borrower cannot make a significant down payment. Home buyers should make sure they understand all the terms of the mortgage contract and how much the PMI insurance will cost them before signing any paperwork. Home buyers should also pay close attention to the loan-to-value ratio of their mortgage, so they will know when it is advisable to drop PMI insurance.