If you are unable to put at least 20% down when you buy a new home, your bank may require you to also purchase private mortgage insurance.
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Today I want to talk about private mortgage insurance, more commonly known as PMI. Is PMI horrible? Is it good? The truth is that it oftentimes lies somewhere in the middle.
PMI is basically an extra fee for those homebuyers who do not put at least 20% down on a mortgage. PMI is something nobody really wants to pay. However, it allows people to buy, for example, a $400,000 home without putting down $80,000.
If you put less than 20% down, you will have to pay a fee every month for private mortgage insurance to ensure your bank’s peace of mind. They only want to be in a position where they have lent out 80% of the loan. If they have lent out 95% of the loan, they have a greater risk. They don’t want to risk losing money if you lose your job or there is some other reason that you are unable to pay your bills, forcing you to sell the home. If they do not get all of their money back from the sale of the house, then the private mortgage company pays the difference.
Generally, it is a good thing. It helps you get into the market and helps you build equity. If you can afford the extra money per month for the policy, which is on a scale, it is worth it.
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Banks do not want to risk losing money, so they require private mortgage insurance when homebuyers are unable to put at least 20% down.
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Most buyers, especially first-time homebuyers, put down less than 20% and have PMI. There are some special programs which waive PMI, so give us a call and we can put you in touch with some of our preferred lenders and they can give you some extra information.
Once you own your property or you have equity of at least 20%, you can actually get rid of your PMI. It does not have to be there forever. Some loans you have to refinance to get out of them, however, other programs allow you to get a new appraisal once you reach the 20% value of the home and remove it easily.
If you have any additional questions about this or are interested in buying or selling, please feel free to contact me. I look forward to speaking with you soon.