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Avoid Private Mortgage Insurance
4 Reasons for which you should avoid private mortgage insurance
You may have planned to buy a home but are unable to execute your plan due to financial inadequacies. This is when mortgage loans come to your rescue.
However, you have to at least make the down payment yourself. You have to save up at least 20% of the price of the house for making a down payment. In case you do not do that your lender may force you to secure private mortgage insurance before signing off the mortgage.
The private mortgage insurance protects your lender from losses in case you default on the mortgage. You may think that it is great for you as you can buy a house without having to save for the down payment. However, it is not entirely beneficial for you.
There are various reasons why you should avoid buying this insurance. Some of the reasons for which you should avoid the private mortgage insurance are as follows.
1. Very expensive: The cost of this insurance is about 0.5% to 1% of the full amount of the entire loan. Thus you will be paying a very high sum of money towards the insurance. This is an unnecessary investment and it is a waste to opt for it just so that you can buy without accumulating the down payment amount.
2. It might not be deductible: All the insurance contracts that were generated in 2007 were tax deductible, only if the tax payer, who is married, earns less than $110,000 every year. If you are married and are applying separately, then the limit set is $55,000. This implies that many such families in which both partners work and earn just above the limit will be left out totally. Some experts say that this income cap may be raised in the future, however that is very uncertain.
3. Your beneficiaries will get nothing: There is no sort of monetary compensation that your kids or your spouse will get, in case you die. The only beneficiary is the institution that has lent you the mortgage. Any proceeds will be paid directly to your lender and not to your beneficiaries. This policy will help only your lender and no one else.
4. Very difficult to cancel: When your equity tops 20 %, you do not have to pay private mortgage insurance. You should know that even if you want to do away with the monthly burden, then it is not going to be easy. Your lender may require you to draft a letter to requesting them to cancel the insurance. You may also need to receive a formal appraisal of the home before its cancellation. This process could be very lengthy and could take several months.
For more tips on this and other Enterprise real estate issues please contact us anytime.
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