A lot of new homeowners prefer to avoid buying private mortgage insurance (PMI) as they believe that they will be putting forth more money than necessary. On the other hand, in some cases this type of insurance actually saves you money. Not most people realize this so read on to find out how you can use PMI to your advantage when buying a home.
How PMI operates
Decades ago, borrowers were mandated to deposit at least 20% down payment on a mortgage loan or else they could not secure the necessary funding to buy a home. In circumstances where an individual did not have the money, the use of mortgage insurance made owning a home possible. Essentially, this type of insurance covers up to 20% of the loan in case 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. With loans that are more than 80% of the property value, lenders insist on mortgage insurance.
If you cannot 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 plan to buy a home for $500,000, then a 20% down deposit would be $100,000 which is a significant amount today. A PMI can be used to lower how much you are required to deposit which can be used to your advantage.
For instance, you can use this money for other investments, to pay down your debt or even to renovate the home.
Another benefit of the PMI is that it is completely tax deductible - leading to significant savings. The good news is that the PMI can be eliminated once the loan value is lowered to less than 80% of the total amount or the home gets appraised for a higher value.
So carefully weigh your options when buying a home and find out how you can make Private Mortgage Insurance work for you.
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