by Leanne Beliveau 10/27/2019

Image by Charles 🇵🇭 from Unsplash

Part of buying a home is researching the market and your finances. Most lenders require you to put at least 20 percent down or pay private mortgage insurance (PMI). Since PMI is a cost that does not lower your interest rate or principal, it’s almost always better to save up that hefty down payment. Lenders charge PMI to cover some of their risk if you do not put the 20 percent down to create equity. Conventional loans backed by Fannie Mae and Freddie Mac always require PMI if you do not put 20 percent down.

Avoiding PMI

In some cases, you could avoid PMI by taking out a special loan or a VA loan. VA loans are only available to veterans, but require very little down or even zero down. The VA doesn’t actually give you the loan—it insures your loan against default. Conventional loans not backed by Fannie Mae or Freddie Mac often have higher interest rates. These two programs are also government-insured loans.

Other reasons to avoid paying PMI include:

  • Tax laws change every year. As of 2017, PMI was no longer deductible, which means that you lose that offset.

  • The lender is the only beneficiary. If you should die before your loan is paid off, it will pay only the lender and only for the balance on the home.

  • You pay PMI until the equity on your home reaches 20 percent. If the market was good when you bought the home, but it tanks a couple of years later, you could be stuck paying PMI for many years.

  • Some lenders require you to pay PMI even after the equity in your home reaches 20 percent. If you do have to take PMI, always read the fine print.

  • Finally, PMI is difficult to cancel. You will need to write a letter to your lender to cancel the PMI. Until you hear from the lender, you will be stuck paying those premiums every month.

  • PMI ranges from .5 percent to 1 percent of the amount you borrowed paid out in equal monthly payments every year. Thus, a loan amount of $200,000 could have a $2,000 per year PMI premium, which is about $167 per month added to your mortgage payment until the lender agrees to cancel the premiums.

Saving the Down Payment

In addition to saving for a down payment, you may qualify for some down payment assistance programs such as the first-time home buyer’s program. These programs help you get that 20 percent so that you do not have to pay PMI. If you have a retirement account, you may be able to use money from that account to help with a down payment.

Though it may seem painful to pay such a large chunk of money, it saves you from paying insurance premiums and it lowers the cost of the loan since you don’t pay interest on the down payment and it is applied to the principal.

About the Author
Author

Leanne Beliveau

 

Enthusiasm, knowledge, and transparency are my aim when working with sellers and buyers. I am fortunate to be working as part of a team (The Bitt and Beliveau Team) with Bob Bittelari, who has 30 plus years experience in the business. It truly is an honor to have the support system that Berkshire Hathaway Commonwealth, and this partnership, provides. They are equally delighted to be working with someone like me who is attentive to her client’s needs and wants, has unlimited energy and the desire to get the job done in a proficient, prompt, and professional manner. I know our community, schools, and resources, especially those in Brighton where I was a resident for 10 years. I am passionate about finding buyers the right homes for them where they will build many wonderful memories. 

I obtained a BS in psychology from Endicott College, as well as an MA in psychology from Brandeis University. I have outstanding people skills, am goal oriented and I pride myself on exceptional communication. I have been a competitive gymnast and gymnastics judge and it is my goal to bring the organization and caring as a nanny and the focus as a gymnast to my real estate career. I also have a three year old daughter Bellamy, who is cute, but fast.