What is PMI in Home Loans and How to Steer Clear of It
Learn what PMI is and practical tips to avoid it in your home loan journey.
Did you know there’s a fee that you might incur on your mortgage that might not clearly benefit you, but can be avoided? Let’s dive into what PMI is and, importantly, how you might avoid it!
What Exactly is PMI?
PMI, or Private Mortgage Insurance, is an extra insurance policy you might need if you’re putting less than 20% down on your home loan. Lenders require it primarily to protect themselves in case you’re unable to make payments. The catch? You, the borrower, pay for it.
In essence, PMI is there to cushion the lender’s risk, but it can add an extra monthly expense to your mortgage payment that many homebuyers would prefer to avoid.
How Can You Avoid PMI?
Avoiding PMI isn’t just wishful thinking—it's quite achievable with some planning and strategy:
- 20% Down Payment: Putting down at least 20% on your home is the most straightforward way to bypass PMI.
- Look for Lender-Paid Options: Some lenders offer to pay PMI, but this often comes with a higher interest rate.
- Consider a Piggyback Loan: Also known as an 80-10-10 loan, where you make a 10% down payment and take a second loan for 10% of the home’s price.
The Budgeting Conundrum
Let’s imagine Jake and Lisa, a fictional couple venturing into buying their first home. Their goal was clear: minimize costs where they could.
They worked diligently on saving for a down payment, opting to take twelve months to exceed the 20% threshold. After seeing potential PMI costs, Jake persuaded Lisa that waiting a bit longer and intensifying their savings efforts by cutting non-essential expenses (like those frequent dining outings) was crucial. They did it by tightening their daily spending, still enjoying small luxuries like home-cooked candlelight dinners!
Weighing the Long-Term
Having a lower interest rate sans PMI can mean potential savings over the life of your loan. Given that PMI can cost between 0.5% to 2% of your loan amount per year, these costs can add up!
Your Thoughts?
So what’s your take? Are you planning to make a 20% down payment on your future home to avoid PMI, or do you have another strategy in mind? Learn more about PMI. Let me know your thoughts or experiences in sticking to, or working around PMI in the comments below!
