Reasons to avoid paying PMI


If you want to buy yourself a home, you can apply for mortgage loan. The lenders, who deal with real estate properties, will approve your application to get the loan, based on several factors. Along with the loan origination fees and other costs you will also have to make a down payment of 20% of the sale value. If you pay less, you have to do private mortgage insurance.
Private mortgage insurance
Private mortgage insurance or PMI is an additional insurance you have to provide for your lenders, if you pay less than 20% as down payment, of the appraised value of your real estate property. It protects the lender against any loss, if you fail to make repayments on your loan. The charge of PMI depends on the amount of your down payment, but, generally it is one-half of 1%of the loan amount. You will not get any tax deduction for the premiums you have to pay towards this insurance.  
Reasons to avoid PMI

There are several reasons for avoiding payment towards private mortgage insurance. Some of these are:

  • The cost of PMI is very high: It costs around 0.5% to 1% of the total loan amount. So, if you take a loan of $200,000, you have to pay around $2,000 per year, if the fee is 1% of the loan amount.

  • The premiums are not tax deductible: You will not get any tax benefit for the amount you are paying towards the premium of this insurance. So, you are literally throwing away your hard-earned money to protect your lender, not you.

  • Continuous payment: You have to go on paying for the PMI for a fixed time. Even when a time comes that you have already made payment for 20% down payment, you will still have to go on paying for the insurance.

When you want purchase a real estate property, it would be better, if, instead of paying for PMI you set aside enough money to make a decent down payment and save your hard earned income.