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Private Mortgage Insurance (PMI) is a
type of insurance which lenders want a home buyer to purchase if their
mortgage
loan is more than 80% of the total value of the house. That means the
buyer pays less than 20% of the house value as a down payment. Usually
the premium rate of PMI varies between 0.5-1.0% of the loan amount.
Upon purchase of PMI, lenders are protected against default by the
buyer.
What Are the Advantages of
Private Mortgage Insurance?
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To pay 20% initial down payment to buy a
house is not easy for many people, especially those who have just
graduated and started to work. By purchasing the PMI, they can just pay
3-5% to get a house. This is very good because they do not have to wait
for so long to own it.
What Are the Disadvantages of
Private Mortgage Insurance?
The premium stands in between 0.5-1% of
the loan amount. If you are purchasing a house worth $200,000 and pay a
5% down payment, your loan amount would be $190,000. You need to pay
$190,000x0.5%=$950 annually. If your PMI is cancelled after 5 years,
you have paid a total of $4,750, just to get your lender protected. It
is an extra burden to you.
Unlike life insurance, a PMI is generally
non-tax deductible. If the reason of your default is health related,
then buying a life insurance would be better off as it protects you and
helps in relieving your personal income tax.
By any means, if you default your
mortgage, the money will be used to pay off your loan. It can't be
redeemed in cash. Life insurance with disablement features may be used
to serve the same purposes, but you are the one who receive the money.
You have the options to either use the money to pay in full or pay the
routine instalments and invest the residue amount.
Do you really need a PMI? The answer is a
subjective one. If you plan to buy a house, why not accumulate the 20%
down payment before making the decision? Deferred gratification may
always bring better tomorrow. Beside paying less interest, you may
avoid having to buy a PMI. This should be a more ideal way i guess. |