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Try to Avoid PMI If You Can
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By:
Joe Klein
There have big huge changes in our lending environment over the last several months. It is harder to qualify for a home loan, and it is really harder to get a low interest loan. It is also harder to avoid Private Mortgage Insurance (PMI) payments.
This product is actually insurance that will pay your loan company, and not the borrower, in case the loan goes bad. This reduces the risk to the mortgage company, and they often require the borrower to pay for this extra coverage. It is not intended to help the actual home owner in any way. But the borrower may have an extra few hundred dollars added to their mortgage bill each month.
Do you have twenty percent of your purchase price to put down on your new home purchase? If so, you probably won't be required to take out this extra coverage. If you purchase, for example, a two hundred thousand dollar home, and can put down forty thousand, you already have substantial equity. You are less risky to the mortgage company. But if you need a loan for the whole amount, you may need to make PMI payments that are one percent of the loan value per year. This means that $200K loan can cost you an extra two thousand dollars a year!
But if you do not have the down payment, you still may be able to avoid increased monthly payments, or at least save some money on it. I think this is important to consider, because you could be making a large extra payment that does not help pay off your loan. It really does not give you any value at all besides helping to get you qualified for a loan on a home you want to own.
Let us look at what happens to your mortgage payment if you can avoid paying for this insurance that is put in place to protect your mortgage company, and not you. One way is called Lender Paid PMI. In return for a small adjustment to your mortgage rate, you can get the mortgage company to purchase the policy.
Take the example of a $150,000 mortgage which is fixed for thirty years at about five point five percent. Your payments should be about $850. You are only paying for the loan balance and interest.
Now let us look at this same loan, even if you got a little bit lower interest rate of right above five percent, but had to pay PMI. Your payment would be about $960 a month for interest, principal, and PMI!
So you are spending over $100 for this coverage that covers your lender if you default. It seems to me, that if they get the benefits from the coverage, they should pay for it. Even though your interest rate will be slightly higher, your actual payments will be lower.
If you cannot totally avoid it, you might be able to get a better deal if you buy your coverage with a sigle upfront payment. You should get a discount on the price, and you may even be able to roll this into your mortgage. But since you will simply be financing the discounted premium, instead of making premium payments every month, it may work out better for you.
A couple of years ago, it was very possible to avoid PMI without making a down payment. People took out an eighty percent loan from one company. They borrowed twenty percent from another lender. This meant they could get into a house without a down payment, and that they could avoid PMI. These are a lot tougher to find these days with tougher lending rules.
I would like to add a word of caution. If you want to buy a home, but cannot put down twenty percent, you should make sure you are ready for this additional responsibility. Could you buy a cheaper home or delay your purchase until you have more money saved.? Sometimes the purchase is still a good idea. It is your decision, but be sure you consider everything before you move ahead. |
Author Resource:-
Get help shopping for home contents insurance too.
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Article From: Hamstoo.com |
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