How to Navigate PMI: How Private Mortgage Insurance Affects Home Buyers

Your Guide to Understanding PMIFirst-time home buyers (or buyers who haven't been in the market for quite some time) may be shocked to learn just how much it costs to buy a home. For a conventional loan, the magic down payment is 20 percent of the total purchase price. In an economy with ever-dwindling savings accounts, many people can't come up with this type of cash for the home of their dreams. It's why Private Mortgage Insurance (PMI) is available to buyers who don't want to delay their homeownership dreams.

Who It Protects

Even though a homeowner is paying for PMI, it's technically the lender's insurance policy and not the buyers. A lender wants to see as much equity in a home as possible. In the case of a 20 percent down payment, the buyer has already secured a fifth of the total home, and the lender is the recipient of a major chunk of change.

If a buyer only puts down 5 percent of the home's value though, then the lender has very little to fall back on if the buyer defaults on their loan. Yes, they can sell the property, but they'd still need to pay for a real estate agent, closing costs, taxes, etc. PMI is a type of private insurance the lender takes out, but they pass down the cost of that insurance to the home buyer.

How It Works

PMI isn't a straight-forward process because it depends on the lender the buyer chooses. Shopping around, asking questions, and negotiating rates are all excellent ways to get a better deal. Usually, the cost of PMI is between 0.5 and 1 percent of the home's purchase price (paid per year.) This means that a buyer could pay up to $2,000 extra a year on a $200,000 home.

Usually, when a homeowner reaches 20 percent equity of the home, they can drop the PMI. Homeowners are encouraged to put as much money toward their payments as possible until they reach that goal. Buyers can pay for PMI in one lump sum, or they can tack it onto their monthly mortgage payment. Should a buyer pay for the PMI in one sum and then move out before reaching 20 percent equity, they may not receive a refund.

Additional Factors

PMI is not always required if the buyer doesn't have 20 percent to put down on their home, but this option is not always recommended. Some lenders will hike up the interest rates instead of charging for PMI, which can ultimately cost more for the buyer in the long-run. It helps to talk to a tax specialist as well as a real estate expert before deciding. PMI is tax deductible as long as the adjusted gross income of the family is less than $109,000. One caveat is that it's not always easy to cancel PMI once a homeowner reaches 20 percent.

Some insurance companies require PMI for a certain amount of time, regardless of the equity in the home. Others require formal letters and statements to cancel that can take months to be approved. This is just another reason homeowners need to be ready to talk to several lenders and find out their process well in advance.

PMI is built to keep interest rates down by passing the risks down to individual buyers and not to the market at large. However, buyers should be careful about who they choose to partner with when buying a home, whether it's in Azure or elsewhere. To understand their options, homeowners should consult with several lenders about their requirements for this special type of insurance.

Dylan Snyder is a seasoned real estate professional serving the Jupiter real estate market, Palm Beach real estate market, Palm Beach Gardens real estate market, North Palm Beach real estate market, and the surrouding Palm Beach County area. Along with being a top producer in Jupiter real estate, Dylan's professionalism and expertise in luxury and waterfront real estate sets him and his team of real estate experts apart from the competition. For more information on Jupiter and Palm Beach real estate for sale, contact Dylan at (561) 951-9301.

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