The private mortgage insurance actually works in a way that other kinds of insurance such as life and health insurance does. However, there are reasons why you need to avoid private mortgage insurance, here are those:
• Cost – typically, private mortgage costs at about 0.5%-1% of the total loan amount on the annual basis. On a loan of $100,000, it only means that the homeowner could be paying more than $1,000 a year or about $83.33 monthly, assuming the 1% PMI fee, which could be a hefty sum. The only thing is that, the average price of a home is about $230,000 meaning that families could be spending about $200 monthly on the insurance. This is so much like paying a car.
• Your heirs would not be getting anything – most people consider that their spouse and kids will receive some kind of monetary compensation if they die. You need to know that this isn’t really true. The lending institution is the only beneficiary of any policy and the proceeds are being paid directly to the lender.
If you are thinking about protecting your heirs and provide then the best to live upon your death, you should get a separate insurance policy. You must never be fooled into thinking that the PMI will help you, as it’s only for your mortgage lender.
• Give your money away – the homebuyers putting than about 20% of the sale price will pay mortgage insurance until the home equity is about 20%. This could surely take years and years and it will amount to a lot of money in which the homebuyers will literally give away. In order to put the cost into a much better perspective, whenever a couple owns a home worth $250,000 will pay about $208 monthly for the PMI and invest it in a mutual fund earning about 8% annual compounded return rate. That money will grow to about $37,707 (without the taxes) in about a decade.
• May not be cancelled – As mentioned, if the equity of the homeowner reaches the 20%, he or she will not be having the need to pay for the PMI. The only thing is that, getting rid of the monthly burden is not as easy as not sending in the payment. Most of the lenders actually need the homeowners to draft a letter requesting that the PMI could be canceled and that you’ll receive a formal appraisal of the home before its cancellation. Generally, this could not take you several months and it depends upon your lender.
• The payment goes on and one – one final issue that simply deserves mentioning is that, some of the lenders need the homeowners to maintain a contract for PMI for a certain period of time. Even if the homeowner has met about 20% threshold, then he or she can be required to keep paying for the mortgage insurance. You should consider checking about it with your lender and read a find print of the PMI contract for more of the specifics.
If you want to save more money, avoiding private mortgage insurance now will surely get you there.