Principal / Interest / Taxes / Insurance
Do you know what PMI is?
It’s not your home insurance – it’s not insurance you pay which pays off your loan should you die before the loan is paid off. So What IS PMI?
You pay for it, but you don’t reap any rewards from it. You are paying an insurance policy betting you will default on your loan before you pay it off. Lenders make it mandatory if you don’t have at least 20% down when you’re buying your home, you pay their Private Mortgage Insurance in addition to your PITI.
What studies have found that home buyers who don’t have enough “skin” in the game tend to default on their mortgages more often than those who have more of a vested interest in their purchase.
The advantage of paying the Private Mortgage Insurance is that you have a lower down payment and can get into your home for 3 to 5 percent down instead of the 20% down. You’re able to purchase your home sooner, not having to wait to save up the additional down.
The PMI premiums are paid monthly, wrapped into your mortgage payment and range from about .5 to 1 percent of your home loan.
So, what does this all mean to you thinking about buying a home in the Northern Utah area with or without 20% down?
The National Realtor® Association in March 2010 reported the national median price of an existing home was then $170,700. If you take that median price, subtract your 10% down, the $153,630 mortgage averages $768 to $1,536 in PMI premiums each year the policy is in place.
The good news is, PMI does not last the life of your mortgage. But it does take some work to get removed …
The Homeowners Protection Act of 1998 (qualified mortgages acquired on or after July 29, 1999) allows you the right to appeal to your lender for PMI cancellation. You can only do this if you have paid your loan to less than 80% of the purchase price (not original mortgage amount). Additionally, once the Mortgage balance is 78% of the purchase price, the lender must automatically cancel the coverage. However, you will probably want to stay on top of that, not leaving it to chance.
In either case, you will have to be current on your mortgage payments, can’t have a second mortgage and the lender does not have to consider any appreciated value, only what has been paid on the mortgage.
If there is any market appreciation, you may be able to opt to refinance your loan with PMI to one that is not.
Above all, talk to your lender about PMI before closing on your home.
For years PMI was tax deductible! …. but there have been changes since the first of the year. Families of incomes up to $109,000 may be eligible for partial deductions. Households with incomes more than $110,000 are not able to deduct any of their PMI.
How to avoid paying PMI:
- Paying down 20% or more on your purchase.
- Opt to pay a higher interest rate, but remember that will be for the life of the loan, whereas PMI can be cancelled later.
- Take out 2 loans to purchase your home. Your first mortgage is for 80% of the purchase and the 2nd loan is for the difference of your down payment and what is needed to finish out the purchase price. Second mortgages generally run at a higher interest rate.
The value of your home does make a difference when the PMI is taken off. If the property declines in value, then it may take you longer to remove the PMI.
If you’re thinking about purchasing a home in the Northern Utah area, our team of local experts is ready to guide you through the home-buying process. We are committed to fast, professional and courteous service to help you understand and feel at ease throughout the home buying process. Our trained and licensed agents specialize in the Northern Utah area real estate market and are prepared to find the right home and get the best price.