Save Thousands When Buying a Home |
According to Freddie Mac, mortgage rates are rising again, with the 30-year fixed rate mortgage average jumping to 4.48% this week. But higher interest rates might pale in comparison to the extra cost you might pay if your home loan requires private mortgage insurance (PMI).
The PMI is a homeownership cost that surprises many first-time homebuyers; one that is easy to overlook in the excitement of going through the home buying process. For the unprepared homebuyer, the cost of paying PMI can be a real budget-buster, adding thousands of dollars in additional expenses each year.
Fortunately, with a little planning and knowledge, you can avoid paying PMI.
What is Private Mortgage Insurance (PMI)?
The purpose of private mortgage insurance is to protect the lender if you default on your mortgage. If you can’t put down a minimum 20% down payment on a conventional home loan, your lender will likely ask you to pay PMI.
The benefit of PMI for homebuyers is that it allows them to purchase a home without paying a full 20% down payment. At first glance, this may seem like a huge advantage, saving the buyer from having to shell out tens of thousands of dollars upfront while still allowing them to purchase a home.
But if you do your research before buying your home, you may find that the actual cost of PMI far outweighs its benefits.
How much could the PMI cost me each year?
Again, it’s important to point out that PMI is insurance that the homeowner pays for and protects the lender, not the homeowner. PMI does not step in and make your payments for you if you fail to make your mortgage payments.
Instead, PMI offers the lender some protection if the homeowner defaults on the loan and the home is subject to foreclosure. The idea behind PMI is that if the lender has to sell the foreclosed house at auction to get their money back, they will recover (according to foreclosure statistics) on average around 80% of the house’s value, and the remaining 20% will be covered. by the PMI policy.
For example, if your PMI is 2% and your loan amount is $250,000, you will pay $5,000 per year. Most people choose to pay PMI in monthly installments, which means you’ll pay around $416 per month in this scenario. This payment is in addition to your mortgage payments, property taxes, home insurance and home maintenance costs.
Keep in mind that this is not a one-time fee, but an expense you will have to pay as long as your home equity is below 20%.
Five Ways to Save Money and Avoid Paying PMI
Given the high cost of PMI, it’s no wonder that many buyers are keen to avoid this expense. Here are five ways to avoid paying PMI.
1. Look for a loan that does not require PMI
Look for alternative loan programs that waive the PMI requirement or offer you down payment assistance. For example, VA loans don’t require PMI, so you can save a bundle if you qualify. Ask about loans insured by the Federal Housing Administration (FHA) or the US Department of Agriculture (USDA). Both agencies have programs to make home ownership more affordable for low-to-middle income buyers.
2. Check out state and local homebuyer assistance programs
More and more communities are making affordable housing a priority, including developing new programs designed to help homebuyers. Some communities focus on “workforce housing,” which aims to make homeownership affordable for people in certain professions, such as teachers, firefighters, or first responders. You can get started by checking out HUD’s local home buying page for programs in your state.
3. Look for an 80-10-10 loan
One strategy to avoid the PMI is to get an 80/10/10 loan where you put 10% down and take out a 10% home equity line of credit and use that to meet the 20% down payment requirement. %, says Eric Simonson, founder of Abundo Wealth. The line of credit will likely be variable, so you’ll want to prioritize paying it off sooner, says Simonson. If you’re unsure how to find a lender that offers 80/10/10 loans, consult your accountant or financial advisor who will likely be able to give you recommendations.
4. Pay a higher interest rate
Some lenders offer loans that allow you to avoid paying PMI in exchange for a higher interest rate. You will need to go through a qualification process, but you will be allowed to deposit less than 20% if your application is approved. Your monthly mortgage payment will be higher, in some cases substantially, because you will have to pay a higher interest rate.
5. Buy a cheaper house
Just because you’re pre-approved by a lender for a certain amount doesn’t mean you should maximize that amount when buying your home.
“I generally don’t recommend using the PMI to buy a bigger house that stretches your finances, because any mishaps in your life could make your mortgage harder to pay and introduce a lot of stress,” says Stanley Himeno-Okamoto, Founder from DRS Financial. The partners.
A wiser approach for a first-time home buyer might be to purchase a “starter home”, a cheaper home that they can comfortably afford without having to incur PMI.
One last thought
Perhaps the most obvious solution to the PMI dilemma is to reconsider buying a home until you are able to put down 20% down payment, thus avoiding the PMI altogether. While this may delay your dreams of home ownership for a while, it could also give you the opportunity to take a step back and consider whether the time is right for you to take on the responsibility and expense of homeownership. home ownership.
Waiting until you have saved enough money to buy a home with a 20% down payment will put you in a stronger financial position to negotiate better terms with lenders. It will also allow you to carefully weigh all your options before making what is likely to be one of the most important purchases of your life.
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This article was produced by Wealthtender and syndicated by Wealth of Geeks.