Private mortgage insurance (PMI). This is one of those financial products that you might be paying for that is NOT for you. You don’t get the benefit of PMI. However, it might be a necessary evil for a while. Let me explain.
(1) What is Private Mortgage Insurance (PMI)?
Pretty much everyone knows that you have to have insurance on your home.
If you have a mortgage on your home, the bank is going to require you to have insurance on that property so that if it were to burn down, get wiped away in a tornado, or get leveled by a hurricane the bank could keep their collateral and you could either rebuild your home or go find another house.
However, if you have a mortgage then you very well might have another type of insurance on it: PMI.
Private mortgage insurance is insurance on YOU as a borrower and not your property.
PMI is basically foreclosure insurance on you for the bank.
This insurance protects the interest of the BANK in the event of you defaulting on your mortgage and being foreclosed on.
AND YOU HAVE TO PAY FOR IT!
That’s right. You have to pay for the bank’s insurance.
(2) How to Avoid Paying PMI
So far PMI sounds pretty crappy, doesn’t it?
Well there is one primary way to avoid paying this insurance.
When you get a mortgage and you put little to no money down as a down payment, you don’t have very much skin in the game.
For example, if you have a $300,000 mortgage and you put down 5%, you have risked $15,000 of your own money while the bank has risked $285,000 of theirs.
Because you have so little skin in the game, the bank wants to have another level of protection in the event that you stop paying on the loan. So they make you purchase PMI.
But if you put down at least a 20% downpayment, the bank will not charge you this insurance.
Do do what you can to put down at least 20% to avoid this.
But to be quite honest, if you don’t have the money to put down 20% (which can be substantial), that is okay. 🙂
Most people don’t put down that much for their first home at all. Just make sure to put down a larger and larger down payment (%) on each home you purchase after your first.
Also, over time if the property value goes up you might find yourself owing less than 80% of the property value. This is awesome!
If that happens, then you can contact your lender and ask them to remove the PMI. You might have to pay for an appraisal out of your own pocket, but it will probably be worth it (depending on the price of the appraisal).
Final Thoughts
If you have PMI on your mortgage now, don’t sweat it.
Full disclosure: I have PMI on my mortgage. I could not afford a 20% downpayment.
And that is okay!
Just put down a larger down payment on your next home that you purchase and move in the right direction. 🙂
You can do this!
I am here for you!
Until next time!
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