What Is Mortgage Insurance?
Is There a Need for and How Much Is Mortgage Insurance?
How Much is Mortgage Insurance?
Pros and Cons of Mortgage Insurance
Pros of Private Mortage Insurance (PMI)
Additionally, you do have some options when it comes to paying private mortgage insurance. For one, you can take the risk of paying it for a year and refinancing. If you think your home value will increase over time, you can refinance your home for the same purchase price at a lower rate or even the same rate but at a new value.
Here’s how that works. Let’s say you buy a home, and you put some work into it. You paint, add granite and upgrade your appliances, flooring and fixtures. The work you put in and the housing market over the first year of your homeownership might make your house more valuable.
If it appraises for more than you bought it for, you might be able to refinance the home for what you owe, and that might be less than 80 percent of the new appraised value. It can eliminate private mortgage insurance.
It’s a good buy if you think you can get a house that will increase that much in value over the course of a year or two. Otherwise, you can continue to pay your PMI until your loan reaches 80 percent of the purchase price, and then you can cancel it.
Cons of Private Mortage Insurance (PMI)
The other big downfall of PMI is that you may not be able to afford the home you want if you must pay PMI. Let’s say you did the math, and you can afford to pay the monthly payment on a home that costs you $350,000. This monthly payment includes your taxes and insurance, and you know you can comfortably pay for that, but it’s at the very top of your budget
Now let’s say you end up paying 1 percent of the loan value after you put down 5 percent. That’s $277 per month or $3,325 per year. You cannot afford to pay the additional $277 per month and still be able to afford to live. Now you need to shop for a home that costs less so you can drop your payment to accommodate your PMI.
For example: if you need to keep your entire mortgage payment with taxes, insurance and PMI below $2,100 per month, you can only afford to buy a home that costs $308,000. That’s a lot less than you can afford if you don’t pay for PMI.