In the market for a new home? Make sure you have enough money saved for the down payment. If you don’t have enough money saved, your mortgage lender will likely require you to get private mortgage insurance. Private mortgage insurance permits homebuyers to receive financing if they can’t afford to make a down payment of at least 20 percent on a home. It is also for people who simply do not want to put down at least 20 percent, and would instead rather have more money to put toward other expenses. The borrower will have to pay money towards the private mortgage insurance until they have made sufficient equity in the home, and the lender no longer deems them a risk. Basically, private mortgage insurance protects the mortgage lending company from a borrower’s failure to repay the loan. While this may seem like a good way to purchase your home without having to save up a lot of money for a down payment, there are a few reasons to avoid getting private mortgage insurance:
Reason #1: The Price Of Private Mortgage Insurance
To start, private mortgage insurance usually costs the borrower roughly 0.5 percent to 1 percent of the entire loan amount, yearly. To put this into perspective, if you had a $100,000 loan and a 1% private mortgage insurance fee, you’d be paying $1,000 annually, or about $83 a month. Additionally, you will have to pay for the private mortgage insurance until your total home equity reaches 20 percent. This is something that could potentially take years to do.
Reason #2: It is No Longer Tax Deductible
2018 saw the enactment of the Tax Cuts and Jobs Act, which makes private mortgage insurance no longer tax deductible.
Reason #3: The Sole Beneficiary is the Lender
Think private mortgage insurance will give your kids money in the unfortunate event that you pass away? Think again. For this policy, the lender is the sole beneficiary, and money will be sent directly to them.
Reason #4: Not Easily Cancelled
Reaching a home equity of 20% of your down payment in order to fulfill the payments towards private mortgage insurance is only half the battle. Most lenders require the borrower to write a formal letter requesting to cancel the insurance, as well as a home appraisal. This whole process can, therefore, end up taking several months. So, even though you reached a home equity of 20%, you will still have to make the monthly payments until the insurance is successfully cancelled.
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