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FHA and conventional home buyers are often shocked at how much private mortgage insurance (PMI) changes their mortgage payment. In fact, the PMI you are paying each month (and the upfront amount at closing) is a complete waste of money. With appropriate knowledge and preparation, you can avoid the nuisance of PMI and its consequences on your mortgage.
PMI protects the lender, not you
Any FHA buyer that doesn’t have 20 percent to put down pays PMI, no exceptions. At closing, 1.75 percent of the sales price is put into your PMI fund, and you will contribute 1 percent of your home’s value toward your fund for many years after that. The fund is designed to protect the lender in the event the you ever default on your mortgage. PMI holds no direct benefit to you, it earns no interest and it doesn’t come back to you as a rebate. The sole service PMI offers you as the buyer, is that it’s tax deductible, along with your mortgage interest on your income taxes each year.
PMI is in lieu of a higher down payment
The best mortgage terms and options are only available to buyers with prime credit and a minimum down payment of 20 percent, there is no way around that. The PMI fee is in lieu of you making a down payment of less than 20 percent, but paying PMI will cost you almost as much over the duration of your loan.
PMI isn’t forever
You have the right to cancel your PMI once you have earned 20 percent equity in your property. For example, if you have a loan for $128,000, you can cancel PMI once you have paid $25,600 on the principal balance. The distressing news is that this will take over 10 years to do. In the meantime, you will be paying into your PMI fund each month, over the same period (and using the same example) you have effectively thrown $8,960 (or more) away toward a needless expense.
What could you use near $9,000 for, besides throwing it away on PMI? As for getting a loan without PMI attached to it, that’s another story. There are a few effective ways to do this:
– Buy a less expensive home than what you “want”, in order to make it easier to save up the 20 percent down payment, qualifying you for no PMI. For every $100,000 you spend, $20,000 is tacked on to your minimum down payment.
– When you sell your current home, use the net proceeds directly to your down payment in order to reach the 20 percent threshold.
– Consider a piggy back mortgage. If you have excellent credit (scores above 780), you might qualify for a conventional loan offering you a first mortgage for 80 percent of the sale price and the remaining 20 percent in a second mortgage. This effectively eliminates PMI and the need for a down payment.
– If you are a veteran or active duty service member, apply for a VA loan. Mortgages backed by the Veteran’s administration do not require PMI.
– Look into housing in rural areas. The United States Department of Agriculture offers a loan to borrowers buying a home in a rural area with 100 percent financing (no down payment) and no PMI.
More from this Contributor:
Getting a Mortgage Step-By-Step
First Person: Are Interest Only Loans Brilliant or Trouble?
What it Takes to Qualify for a Mortgage