Homeownership is a dream for many Americans, but saving money for a down payment might be difficult, especially if it is 20% of the buying price. It can be considerably easier with private mortgage insurance (PMI) which allows the buyer to buy a house with as little as a 3% down payment.
However, PMI comes with an additional fee you will have to pay, either as part of your monthly payment or as a flat sum upfront. Though this may appear to be an unexpected added cost it has some perks that potential homeowners often overlook. This post will explain the advantages of PMI.
1. Own A Home Sooner
You can get into a home faster thanks to private mortgage insurance. If you have to save enough money to put down 20% of the purchase price, it could take many years before you can own a home. This may not appear to be the perfect situation for individuals who do not want to rent and instead wish to own a property. For some people, paying PMI every month is preferable to not being able to buy a property at all.
2. PMI Does Not Last Forever
Another advantage of PMI is that it does not last indefinitely. It is no longer required after your home’s equity reaches 20% of the loan amount. This growth in equity is not limited to the amount you pay towards your mortgage; it can also be linked to the value of your home. As a result, PMI puts you in a position to profit from property appreciation (when your home gains in value from the time you purchased it), or you have your home revalued following upgrades.
However, to terminate your PMI arrangement, your payments must be current and you must have a satisfactory payment history.
3. Increase Your Housing Options
As private mortgage insurance reduces the amount of money you need to save for a down payment, it can broaden your home buying options. For example, if you require to pay down 20% on a home that is on the market for $300,000 you would need $60,000 in savings. On the other hand, if you have to put down 5% you would need to save only $15,000. That is a difference of $45,000. This is a lot of money! And, if you cannot afford the 20% down payment, you will have to settle for a home in a considerably lower price bracket.
Therefore, by paying the PMI every month you will be able to purchase a more expensive home or a home in a better neighborhood that you might otherwise not be able to afford.
However, do the maths to ensure you can still manage the monthly payments. This could be a smart option to get into the home you have always dreamt of.
4. Opportunity To Build Equity
Finally, private mortgage insurance allows you to take advantage of property appreciation. The sooner you buy a new house, the sooner you can start accumulating equity. The difference between the value of your property and the amount you owe on your mortgage is known as home equity. Your loan debt falls as you make monthly payments, and your home equity grows. Your home equity can be used for a variety of things in the future, including debt reduction, home repair projects, and even starting a business.
Also, though real estate values vary, the chances are that the home will appreciate over time and you can sell it for a higher price.
5. PMI Is Tax-Deductible
Last but not least, payments for private mortgage insurance are tax-deductible as it is related to your mortgage. However, not everyone is eligible for the PMI deduction. If your adjusted gross income is less than $100,000, the PMI is entirely deductible. But if it is more than $100,000, the deduction is reduced; nevertheless, at $109,000, it is fully phased out. For specific information, speak with your tax advisor.
Depending on your financial condition and other priorities, it can make sense to make a smaller down payment and choose PMI even if you have the funds for a 20% down payment. Emptying your savings isn’t always a wise decision.
Are you prepared to purchase a home? Call us right away for a free consultation. We would be pleased to assist you with your mortgage and private mortgage insurance application.