Tuesday, April 25, 2017
Keep homeownership costs in check by avoiding PMI
While buying a home can be exciting and rewarding, it also can be stressful and expensive.
Homeownership will likely be one of the biggest investments of your life. Not only does a house come with mortgage and insurance payments, it also requires budgeting for property taxes and home-improvement repairs along the way.
And sometimes, homeownership brings another expense—Private Mortgage Insurance.
What is Private Mortgage Insurance?
Private Mortgage Insurance, also called PMI, is a type of insurance that protects the lender, not the borrower, in case you default on your mortgage loan.
Typically, with conventional financing, borrowers who pay less than 20 percent of their home’s purchase price at closing are required to make PMI payments as part of their monthly obligation.
Many factors determine the cost of PMI, according to Laurie Von Ah, a mortgage lending consultant at Dupaco Community Credit Union’s Asbury, Iowa, branch.
“The cost is based primarily on the borrower’s credit and the loan-to-value,” Von Ah says. “The better the credit and the more the borrower contributes toward the down payment, the less the cost will be.”
How can you avoid PMI?
PMI increases your total monthly payment, leaving you with less money to pay for other things.
You can avoid PMI by saving 20 percent for your down payment on your home. A free Dupaco Money Makeover can help you review your entire financial picture and create a budget and savings plan to help you reach that goal before you jump into homeownership.
“Dupaco has experienced representatives who are eager to help our members find a budget plan that works for their situation,” Von Ah says. “Dupaco also has access to many sources of grant funds for qualified first-time homebuyers, and we accept gift funds as a source of down-payment funds.”
To qualify, gift funds are required to be gifted from a family member of the borrower.
Can you remove PMI later?
Sometimes, PMI can’t be avoided. But even if you can’t afford a 20-percent down payment when you close on your home, that doesn’t mean you’ll always carry PMI.
Once you have at least 20 percent equity in your home, the PMI can be removed.
“The borrower can contact us and request an appraisal on their home to determine the home’s value,” Von Ah says, adding that the appraisal cost will be at the borrower’s expense.
Otherwise, you can avoid the cost of an appraisal if you wait until the balance of your loan is at 78 percent of the value.
“With this, they can call us, and we will just submit the request to have it removed,” Von Ah says.
By Emily Kittle