Is PMI really that bad?
In North Carolina, depending on the loan you choose, you may discover that you will need PMI, or Private Mortgage Insurance, to secure your mortgage. Some people are opposed to the thought of PMI, but is it really that bad?
If your down payment for a home is less than 20%, lenders may require that borrowers purchase private mortgage insurance. This will, in turn, protect the lender in case the borrower is unable to pay the mortgage. In other words, mortgage insurance guarantees your lender will get paid if you default on the loan. For the borrower, it has a benefit, too: getting mortgage insurance allows you to purchase a home before you have the full 20% down payment saved.
For example, let’s say you buy a $175,000 house and make a 10% down payment, meaning that you borrow $157,500. The mortgage insurer charges an annual premium of 0.49 percent. The insurer multiplies the loan amount by 0.0049, for an annual premium of $771.75, which is divided into 12 monthly payments of $64.31.
You can avoid paying mortgage insurance premiums by putting down 20% or more when you buy your home. If you can’t put down 20%, your mortgage planner will be able to offer a variety of options that may work for you. That’s the advantage of working with a lending expert! You may find that you are actually better off paying PMI than the alternatives. Once a borrower has built up a certain amount of equity in the house, typically 20%, the mortgage insurance policy usually can be cancelled.
Keep track of your payments on the principal of the mortgage. When you reach the point where the loan-to-value ratio hits 80%, notify the lender that it is time to discontinue the PMI premiums. Federal law requires lenders to tell the buyer at closing how many years and months it will take for them to reach that 80% level and cancel PMI. Lenders must automatically cancel PMI when the balance hits 78%.