Do You Need Private Mortgage Insurance?
Good practice in real estate lending and homeownership suggests that the homeowner ought to have at least a 20% equity stake in their home. That is all well and good but it would put ownership out of the reach of most people in the country. As a nation we tend to value our homes and the majority of residences are owner-occupied. This is even encouraged by government policy.
The reason having equity is a good idea is that, with variations in the market and other risks, you might not have enough equity to pay off the balance in extraordinary circumstances, such as we have seen tragically happen to so many homeowners in, say, the last five or six years. As with many other things in this life, it is all about the risk.
So, to make it possible for more people to own homes there are two options to insure your low down payment purchase. The first is with an FHA or VA government-backed loan and insurance policy, and the other is to get a conventional loan with private mortgage insurance (PMI).
Here Are The Private Mortgage Insurance Basics
There are a few different options and you might find that you do win with the conventional loan that requires a PMI payment. Discuss this carefully with your lender to find the best option. Depending on your tax bracket you might be able to get a deduction for your monthly PMI payment.
There are some downsides to private mortgage insurance. It is not particularly cheap and it is due on the entire balance of your loan. The beneficiary is your lender not you or your heirs. That’s right! You are paying for their insurance policy.
However, if you do not have an adequate down payment home lenders will only agreed to lend to you if they have cover. Over the long term it might suit you better to find the larger down payment or refinance at the earliest opportunity. Alternatively, look into your options for an FHA or VA government-backed home-loan instead.
The Right Time To Drop PMI
It is time to drop your private mortgage insurance when your loan balance drops below 80% of your home value. That all sounds good but with the ups and downs of the real estate market of the last few years, your lender is going to be more difficult to convince.
In most cases the PMI should drop off when you reach 22% equity stake, based on your initial appraisal, as long as you have never had any delinquencies on the loan. They may add other requirements that make the process of dropping PMI cumbersome and time consuming.
Other than just patiently gritting your teeth and waiting it might be worth carefully looking at the costs of refinancing instead. Like many other financial facts of life, private mortgage insurance can be a benefit when it enables homeownership for those would not otherwise purchase the home they desire.