Pmi Making A Comeback
(Taking out a mortgage to finance a home purchase is a huge commitment and even bigger financial responsibility. )
Traditionally, to purchase a home and qualify for a mortgage, you must have around 20 percent of the value for the down payment. If you could not come up with that specific amount, which is often times very hard to do, you would have to pay Private Mortgage Insurance, or P.M.I., which protects the lender if you stop making your mortgage payments.
P.M.I. has become increasingly less common in the mortgage industry, as lenders have come up with alternative loans that bypass P.M.I. No one wanted P.M.I. because it is just one extra cost to pay a month that is tacked on to a mortgage payment, and does not help to gain equity and is not tax deductible.
But P.M.I. seems to be making a come back as it could be cheaper than some of the risky loans that are used to avoid it. Sometimes paying a simple P.M.I. premium is a lot cheaper than the monthly mortgage payments of a non-traditional, alternative type of loan.
A September 24, 2006 article by Bob Tedeschi of The New York Times, “Weighing the cost of Insurance,” looks at paying a P.M.I. versus taking out a loan that avoids it.
“In recent years, borrowers have gotten increasingly creative about avoiding private mortgage insurance, the cushion that lenders require when homes are bought with small down payments. These borrowers have used adjustable-rate mortgages and so-called piggyback loans to reach 20 percent down payments, the minimum required to avoid P.M.I. But now that such loans are getting more costly, private mortgage insurance, or P.M.I., is becoming a more attractive financial option again.”
P.M.I. can be less expensive especially if you have a lower credit score or are in a lower tax bracket, because these things will cause your interest rate to be much bigger, thus increasing your monthly mortgage payments.
Piggyback loans are the main mortgage products that home owners take out to avoid PMI.
“With such loans, borrowers take a first mortgage and a second mortgage in tandem, with the second loan increasing the down payment to 20 percent. The savings can be significant. On a $230,000 home, mortgage insurance premiums would range from $50 to $100 a month. But interest rates for second mortgages often hover around 1 percent higher than the prime interest rate, which has jumped from 4 percent to 8.25 percent in the last two years. As a result, those with piggyback mortgages can face higher monthly payments than those with P.M.I.”
The one thing that does make having a higher mortgage payment a good option for some is that mortgage interest is tax deductible, while P.M.I. premiums are not. Also, paying your mortgage builds equity, while insurance does not. As you can see there are pros and cons to both alternatives. Another benefit of P.M.I. though, is that is protects homeowners should something happen to their income flow.
“Although extra costs are never palatable, P.M.I. can provide valuable benefits, mortgage professionals said. Genworth Mortgage Insurance, among others, pays a borrower’s mortgage, taxes and insurance costs, up to $2,000 monthly for six months, if the borrower becomes unemployed involuntarily.”
If you do not have the 20 percent that is required to buy your home, weigh your options carefully. If you have a bad credit score, consider making the P.M.I. payments on a traditional mortgage before you jump into anything too risky.
