Chances are, you’ve heard some buzz about the record low mortgage rates 2020 has brought. While the state of the economy might seem dire for some, there’s never been a better time to purchase or refinance a home. If you’re considering purchasing a home but are concerned about PMI costs, rest assured that it’s still a great time to buy.
PMI is not inherently bad and actually offers homebuyers a unique opportunity to qualify for low-interest, low-down payment loans.
Keep reading to learn more about PMI and how to decide if it’s right for you.
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance, or PMI for short, is a type of mortgage insurance. It’s typically required when you purchase a home with a conventional loan but don’t have enough equity in the home.
Most often, this is the case when you can’t make a down payment of at least 20% of the home’s value. PMI is designed to protect your mortgage lender in the event that you stop making your mortgage payments.
PMI is offered by private insurance companies and arranged by your mortgage lender. PMI is also required when you refinance a home without 20% equity.
Paying for PMI
How exactly you will pay for PMI depends on your lender. Some lenders offer multiple methods of payment. It’s important to discuss your options with your lender before signing your loan.
Most of the time, PMI is paid as a monthly premium and added to your monthly mortgage payment.
However, some lenders may require you to make a lump sum payment at the time of closing. This means you will pay all of your required PMI up-front. Be careful if you choose this option because you might not get your money back if you move or refinance your loan.
You may also have the option to pay for PMI using a combination of these two methods. You may be able to pay a partial amount up-front and then the rest as a monthly premium.
Finally, your lender might offer you the option of what is called “lender-paid mortgage insurance.” With this option, you won’t pay for PMI monthly, but your mortgage payment will be higher to compensate your lender for the additional risk they are taking on.
Be sure to discuss your options with your lender as one option may be more realistic for your financial timeframes.
When Can PMI Be Cancelled?
There are two main ways to cancel your PMI. The first is to pay down your loan to 78% of your purchase price.
The second is to have your home appraised for a higher amount than your purchase price, showing at least 20% home equity. With the current low-interest rates and high home values, many homeowners are opting to refinance and earn equity through an appraisal.
The Cons of PMI
While PMI may help you get a better loan or help you qualify for a loan in the first place, there are some factors to consider when deciding whether to choose a loan that requires PMI.
For one, PMI may increase the cost of a loan. It’s also important to realize that PMI is designed to protect your lender and doesn’t offer you any protection if you have problems repaying your loan.
It is possible to find loans that require smaller down payments and don’t require PMI, but these loans usually come with higher interest rates.
For some buyers, the cost of additional interest will be less than the cost of PMI. Buyers should take into account factors including how their taxes will be affected and how long they plan to live in the home to determine which option is better for them.
If you are able to put 20% down, you will be offered a loan with a lower interest rate and will have more equity in the home right away.
You’ll also want to see if you qualify for any other types of loans that could save you money on PMI.
When Are PMI Costs Worthwhile?
PMI tends to have a bad reputation, but the truth is that PMI isn’t always bad. The existence of PMI offers many buyers a chance to become homeowners that they wouldn’t otherwise have.
As the values of homes rise across the nation, it becomes more difficult for many buyers to purchase one. Putting 20% down on a home purchase is no longer a reality for most buyers, especially in this economy.
When homebuyers don’t have the savings to make a substantial down payment on a home purchase, PMI makes it possible for them to get a low down payment loan. Mortgage rates are lower than ever right now and it’s a great time to invest in a home. Potential homebuyers, especially first-time homebuyers, who just don’t have the ability to save can still purchase a home thanks to PMI.
After all, rent costs can often be higher than a mortgage payment and result in no investment for the renter. If you’re considering purchasing a home but don’t have 20% down, PMI is your friend.
Purchasing a home is an investment and the minimal PMI cost is a small price to pay for the opportunity to own your own home.
Are You Ready to Buy a Home?
If you’re looking to buy a home in the Pacific Northwest, there’s never been a better time than now. The current economy is full of opportunities for potential homeowners who don’t have a huge savings account.
For these buyers, incurring PMI costs is worth it to become a homeowner.
Buying a home can be stressful, but it doesn’t have to be. The most important thing you can do is choose an experienced and trustworthy lender.
Click here to contact us today and start the process of buying your dream home.