What is PMI? Private Mortgage Insurance, often called PMI is a special type of insurance you might be required to pay for if you can’t come up with a 20% down payment on a home.
PMI protects the lender, not you. If you default on the mortgage, the mortgage insurer will cover a percentage of the lender’s loss. It sounds like a great way to buy a house without having to save for a down payment, but it’s one you can avoid. Here’s why you should…
Reasons to avoid PMI
1. Cost: The cost of PMI varies slightly from policy to policy. It costs anywhere from 0.20% to 1.50% of the balance per year, based on your total down payment, credit score, and loan term. The larger you borrow and the smaller your credit score, the larger your PMI payment will be. Over the course of years, that can mean paying thousands of additional dollars.
2. PMI may not be tax-deductible: PMI is only tax-deductible if you took out your loan in or after 2007 and you itemize your deductions using Schedule A.
3. Hard to cancel: The Homeowners Protection Act of 1998 address borrowers’ difficulties in canceling PMI once they have 20 percent equity. However, eliminating the monthly burden will not be easy. Many lenders require an appraisal of the home prior to its cancellation. Unfortunately, it may take several months depending on your lender.
There are multiple situations where you can apply to remove PMI such as refinancing out of an FHA loan, paying extra mortgage toward your principal balance, or obtaining a new appraisal. For loans covered by the Homeowners Protection Act of 1998 (HPA), borrowers are only required to keep the private mortgage insurance as long as the loan-to-value(LTV) percentage is less than 80%. On that ground, you can request to have PMI removed when your balance reaches 80% LTV based on the original purchase price or appraised value of your home. If your lender does not approve your request in a timely manner, you can follow up by sending written complaints that restate your request.
If you want to buy a home, always think about whether the additional cost of PMI makes financial sense.