Private Mortgage Insurance PMI

Many new homeowners prefer to avoid purchasing private mortgage insurance (PMI) as they believe that they will be putting forth more money than necessary.

However, in some cases this type of insurance can actually save you money. Not many people realize this so read on to find out how you can use PMI to your advantage when purchasing a home.

How PMI Works

Decades ago, borrowers were required to put at least 20% down deposit on a mortgage loan otherwise they could not secure the necessary funding to buy a home.

In situations where an individual did not have the money, the use of mortgage insurance made home ownership possible. Essentially, this type of insurance covers up to 20% of the loan should you default on your loan.

If this happens and you owe $150,000, then if the bank sells the home for $130,000 the difference of $20,000 will be covered by the insurance.

For loans that are more than 80% of the property value, lenders require mortgage insurance. However if you are not able to put 20% down, then you can always borrow up to 95% of the property value with a PMI.

How to Make PMI Work for You

If you are planning on purchasing a home for $400,000, then a 20% down deposit would be $80,000 which is a significant amount these days.

A PMI can be used to reduce how much you are required to put down which can be used to your advantage. For example, you can use this money for other investments, to pay down your debt or even to pay for home renovations.

Another benefit of the PMI is that it is completely tax deductible which can further lead to significant savings. The good news is that the PMI can be eliminated once the loan value is reduced to less than 80% of the total amount or the home gets appraised for a higher value.

So be sure to carefully weigh your options when purchasing a home and find out how you can make PMI work for you.