In 2017, 5.67 million pre-existing homes were sold in the USA alone. When looking at new structures, an additional 600,000 were sold.
Those numbers help shed light on the fact that the global housing market has fully recovered from the last recession and that people are jumping at the chance to be homeowners again.
While owning a home can be an incredibly validating experience, it can also be a complicated one. Paperwork, deadlines, deposits, confusing mortgage terms and more can throw a first-time homeowner for a loop.
Expanding on mortgage terms, one of the terms that gets the most questions is PMI.
"What is it?" "How will it affect me and my monthly payment?"
If you're looking to buy a house and are asking those questions, our team is here to help. Below is everything you need to know about PMI and the impact it can have on you.
What is PMI?
PMI stands for private mortgage insurance. This insurance is provided by a 3rd party and offers the lender protection if you vacate your property early and leave your lender with losses.
This protection offered to lenders makes them more willing to give you the money you need to purchase your home, despite the fact that you may not have a considerable amount of equity to offer right away.
To dispel common confusion, let us make clear that PMI benefits the lender solely. It in no way offers the borrower anything in terms of insurance for their home's valuables, damage incurred to their property due to disasters, or anything else.
Who Needs to Pay PMI?
PMI is paid for in full by the borrower. It's typically just an extra cost laid on top of the monthly mortgage your lender asks you for. To that end, the lender will typically arrange for the PMI provider and ask that you pay fees associated.
Fortunately, not all borrowers need to pay PMI. PMI gets paid for by borrowers who put less than 20% equity down upon purchasing their home.
Because at 20%, lenders feel that borrowers have enough equity in their home to not willingly default on payments. Below 20%, lenders feel there is a risk that, given borrowers don't have much invested value in the property, they may not take their investment seriously.
Bottom line, if you're purchasing a home and expect to have less than 20% worth of the home's value to offer up-front, expect to pay PMI.
How Much Does PMI Cost?
PMI costs are usually based on a fixed scale that moves according to your home's value. As a general rule, expect to pay between $30.00 - $70.00 per month for every $100,000 you borrow for your home's purchase.
While generally collected on a monthly basis, your PMI may get asked for up front for the year like property taxes. You may even have a hybrid plan where some of your PMI gets asked for up front and a smaller portion is collected monthly.
Your PMI mortgage terms will vary depending on your lender. Be sure to understand what your payment schedule will look like before agreeing to anything.
How Long Do You Have to Pay PMI For?
PMI, especially if your home's value is high, can be a nuisance. There is a silver lining to paying it, however.
PMI payments terminate well before your loan reaches maturity.
That means homeowners won't need to continue paying for it during the full time they're making house payments.
Typically, you will stop paying PMI the moment you've attained 20% equity in your house. When this happens, your lender may notify you of the threshold you've crossed and let you know that PMI is no longer necessary.
In case this doesn't happen, stay mindful of where you're at in your payments. As you approach 20% equity in your home, begin to discuss the process of removing PMI premiums from your payments with your lender.
Your being informed and aware will help reduce chances that you'll end up overpaying into your mortgage insurance policy.
Reasons to Avoid PMI
We hope to have impressed upon you the burden PMI represents and that it doesn't provide you any value as a buyer. To further hit home our point, consider these additional reasons as to why PMI is worth avoiding:
Payments are Usually Not Tax Deductible
Depending on where you purchased property, PMI may not be tax deductible. It used to be in the United States but with the recent passing of the Tax Cuts and Jobs Act, come 2018, you'll no longer be able to benefit tax-wise from insurance payments.
PMI Can Be Difficult to Cancel
While some lenders will make the PMI cancellation process easy, many don't. Lenders have a vested interest in continuing your policy for as long as possible to continue safeguarding themselves.
Because of this, they may require that you draft a formal letter requesting cancellation. They may even require a home appraisal prior to granting cancellation.
You May Get Required to Pay PMI Past 20% Equity
Depending on your mortgage terms, PMI may be set for a designated period of time. That means, even if you've crossed the 20% equity threshold, you may still need to pay PMI until the period of time in your terms has lapsed.
Be sure to ask your lender about when PMI will stop for your loan so you're not caught by surprise later.
Wrapping Up PMI Mortgage Terms
If your mortgage terms express your needing PMI, you'll want to understand everything that PMI entails.
You should be aware of how your PMI payments will get structured. You should know how much you're expected to pay. You should also be aware of when payments will stop.
Staying informed in regard to your PMI payments can help set you up for successfully managing your home's associated costs. To avoid PMI all together, consider waiting until you have a 20% down payment ready prior to buying your home.
This may mean a little extra time in a rental property but will also mean more money in your pocket!
Buying a home can be a big time commitment. When investing in such a massive life-changing event, it's important that you're covered.
At Insurdinary, we help people find preferred, high-quality, low-cost insurance products for their home and beyond. We service people all over the world!
That means, whether you're shopping for home owner's insurance in Canada, the United States or elsewhere, we can help you.
Get protected and let us find you the insurance policy you need today!