When you buy a home, your lender will often put great emphasis on getting Private Mortgage Insurance (PMI) before you secure a loan. Your lender will also suggest you take out PMI if you’re opting for a conventional loan.
What’s the Purpose of PMI?
PMI protects the interest of lenders in the event that you default on the loan. If you’re taking out a Federal Housing Authority (FHA) loan, they have a similar requirement in place, but the rules differ. Regardless of the type of loan you plan to take out— conventional loans or FHA loans— it’s important to avoid PMI or to remove it as quickly as possible.
Reasons You Need to Avoid PMI
Here are a few reasons why it’s better to avoid PMI:
- High Cost. PMI costs between 0.5% to 1% of your whole loan amount every year. You’ll find yourself paying around $1,000 each year or $83 each month on a $100,000 loan, given the PMI fee is 1%. You could be paying way more money than you should if you agree on taking out a PMI.
- Not Deductible. PMI is no longer tax-deductible. Before, when it was deductible, your adjusted gross income had to be less than $110,000 each year for it to be deducted. Mortgage insurance premiums can’t deduct PMI from their gross income due to the 2017 Tex Cuts and Job Act (TCJA).
- Children and Partner Get Nothing. If you pass away, your children and partner will not receive any monetary compensation. In other words, the PMI does not go toward paying off the loan for the house. In order to protect your children and partner in the event that you pass away, you’ll need to take out a different insurance policy.
- Pay PMI for Several Years. If you pay less than 20% of the value of your home, you’ll find yourself paying PMI for several years. For some, the PMI drops off once you your home’s total equity reaches 20%. In some cases, the PMI doesn’t automatically drop off (see below).
- Difficult to Cancel. Once you’ve taken out a PMI, canceling it is not always easy and can often be a difficult process. You’ll have to draft a letter asking the lender to cancel your PMI and ask them to perform a formal appraisal of your property before you can cancel it. The entire process can take several months, depending on the lender. That’s several months of paying for the PMI, money which could be better spent paying off the loan.
- Unable to Cancel. Payment Continues Forever. In some contracts, you’ll have to maintain your PMI contract for a specific number of years as instructed by the lender. Even if you reach the 20% mark, you may still have to pay the PMI. To avoid this, make sure to read the entire terms and conditions before signing.
How Can You Avoid Paying PMI?
You can use a piggyback mortgage to avoid paying PMI. If you want to buy a house and you have a down payment of 10% saved, you may be able to qualify for the 80/10/10 agreement. You’ll obtain a loan totaling 80% of the value of your home and then another loan called the piggyback loan for 10% of the value. Next, you pay the final 10%. When you split up your loan, you can deduct the interest on both the loans and successfully avoid PMI.
What If It’s Too Late for Me?
It’s never too late, even if you have one of those difficult PMI payments or the contractual one, we may be able to help remove your PMI from your mortgage loan. Contact Northwest Mortgage today and we help with removing the PMI.
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