The Pros and Cons of Private Mortgage Insurance

During the home buying process, many borrowers hesitate because failing to put down a large enough down payment often means they must pay private mortgage insurance.

While many buyers immediately assume that private mortgage insurance is something to be avoided, and in many cases it is, there are pros and cons to taking out a private mortgage insurance policy.

Read on to learn more.

The Benefits and Drawbacks of Private Mortgage Insurance

Private mortgage insurance (PMI) can be a good option for buyers who don’t want to pay a full down payment. Here are some of the benefits of this route:

• PMI offers a lower down payment.While PMI is put in place to protect lenders, it can also help homebuyers get the home they want with less money down. This makes home ownership a reality for more people and can contribute to hastening the process for buyers who would otherwise need to wait for years to purchase their dream home.
• PMI premiums are tax-deductible.While not all homeowner’s insurance is tax-deductible, the premiums you pay for PMI are.

While there are some distinct benefits to PMI, this route also offers some drawbacks. The primary cons of PMI are as follows:

• PMI premiums can be expensive. PMI premiums are between .5% and 1% of the total of your loan. This means that home buyers who are putting less than 20% down may be paying steep premiums for private mortgage insurance, so it’s smart to ensure you can afford it before you take the leap.
• It’s easy to overpay for PMI. While some PMI plans automatically stop when you reach 22% equity in your home, many don’t, and you’ll have to stay on top of your house payments to ensure you’re not overpaying on PMI in the long-term.

To Opt for Private Mortgage Insurance, or to Avoid it?

While private mortgage insurance offers some benefits, it’s also something would-be homebuyers should consider carefully before leaping into. Because it tends to be more expensive and can easily create a situation in which homeowners overpay for their insurance, it’s not something that every homeowner should opt to undertake, and some people may be better off waiting until they can make a large enough down payment to avoid it.

With that in mind, the choice of whether or not to purchase private mortgage insurance is up to you and your financial lender. The option offers distinct pros and cons (such as allowing home buyers to buy a home with less money down) and understanding the ins and outs of it is one of the best ways to ensure you’re making the smartest possible decision for you and your family – without getting into uncomfortable financial waters