PMI is typically required for mortgages that exceed 80 percent of the appraised value or purchase price of a home, and is generally seen by lenders as a protection against the homeowner’s failure to make timely payments. While it can be beneficial, there are potential drawbacks as well. This article explores the pros and cons of private mortgage insurance and provides useful information for buyers.
The primary advantage of PMI is that it allows borrowers to secure financing with a low down payment. With PMI, borrowers can purchase a home with as little as three to five percent down payment. This makes home ownership more attainable for many people who otherwise would not have sufficient funds to make a traditional 20 percent down payment. Not only that, but PMI also helps reduce the amount of money needed for closing costs.
In addition, private mortgage insurance is usually tax deductible under certain conditions. It is a one-time expense for the borrower, which typically must be paid up-front at closing or built into the monthly payments. PMI may also provide additional peace of mind to lenders, since they are getting some extra security against a borrower's potential default.
On the other hand, there are some drawbacks associated with PMI. The primary disadvantage is that it adds to a homebuyer's cost of borrowing in the form of premiums that are paid on a monthly basis, either directly or by being built into the loan payment. It also increases the overall cost of the home, as the loan amount factor into the purchase price is increased. Furthermore, PMI may not provide full coverage for lenders, as it only covers some types of risks, such as late payments or foreclosure; it doesn't cover damage due to natural disasters or other unexpected events.
Finally, depending on the individual lender's policy, it may be difficult, or even impossible, to cancel private mortgage insurance. Once the borrower's equity reaches 20 percent or higher, they usually have the right to cancel the PMI, however, the terms of the loan agreement will dictate the exact conditions.
In conclusion, private mortgage insurance can be beneficial for those who don't have enough money saved up for a 20 percent down payment. It allows the borrower to make a lower down payment, and it can provide tax deductions and additional peace of mind. However, it does increase cost and may limit the options available for cancelling it. As with any major financial decisions, it is always recommended to discuss the pros and cons of private mortgage insurance with a trusted professional.
This article was contributed on Oct 12, 2023
