When you are applying for a home loan in the Tri-Cities area, you may find yourself with a choice. You might either be able to put more money down on a home and skip purchasing private mortgage insurance (PMI), or you may be able to reduce your down payment so long as you are willing to buy PMI.
PMI does mean that you are taking on another monthly bill. Being as your monthly home loan payments will also be higher with a lower down payment, your budget each month may be subject to more strain than you would like.
Home Buying in Florence, AL
But does that mean you should always avoid purchasing PMI? Not necessarily. There are some situations where it may be worth it. Following are some reasons why PMI may be beneficial in certain cases.
- PMI doesn’t need to be a long-term commitment. A lot of homebuyers believe they will be paying for private mortgage insurance for the entire lifetime of their loan. But this is not always true. Lenders often only require you to buy PMI temporarily. As you make consistent monthly payments on your mortgage, the risk associated with your loan declines. At that point, you may no longer need to pay for PMI. How long the PMI requirement lasts depends on the mortgage and your agreement with the lender. While some lenders do demand that you purchase PMI until your mortgage is fully paid off, many will let you stop paying for it after several years. Indeed, some may require it for less than a year. Do not leave yourself with unnecessary guesswork in this regard. Ask your lender directly how long you will need to buy PMI. If you will not be saddled with it for the lifetime of the loan, it may not be such a bad short-term sacrifice.
- With PMI, you may be able to move into a new home now instead of waiting. Another advantage of paying for PMI if it lowers your down payment is that it may get you into your new home faster. This is not just a matter of timing and convenience. It can also save you money in certain situations. Imagine for example that you have just moved to the area and need to get into a house fast so that you will not be stuck paying more money for an extended stay at a motel. In this case, it might make more financial sense to pay the PMI and get into your house right away.
- You can take advantage of today’s home prices. PMI could feasibly pay for itself if home prices are rising fast and foregoing PMI would mean missing out on a prime investment opportunity because you cannot afford a high down payment. If you wait for months to purchase a house (or even a year or two), the increase in home prices over that time span could add up to as much or more than you would pay for a year or two of PMI. How can you know if this is the case in your situation? For one, you would need to find out how long you would have to be paying for private mortgage insurance, and what the monthly premiums would be. For another, you would need to look up the rate at which home prices are increasing in the area on average. At that point, it is simply a matter of doing the math to figure out whether it is likely that paying for PMI and moving into the home now would save you money over purchasing it without PMI later at a higher price.
- You can keep your finances more liquid. One more reason to think about paying for PMI is simply to keep your down payment from swallowing up your financial resources. If covering the cost of a high down payment would take away your safety net, that is not necessarily a financially acceptable choice, even if it would technically be less expensive.
PMI is an Extra Monthly Expense, But in Some Cases, it is Worthwhile
While homebuyers often go out of their way to avoid paying PMI, there are some cases where PMI can save you time and money as an alternative to a high down payment.
Hopefully we’ve given you some things to think about with respect to your own borrowing decisions. If you still need further guidance, our loan experts would be happy to go over your finances with you and explain the pros and cons of PMI with you. That way you can make an informed decision. Please call us at (205) 495-0313 to schedule your consultation.