One of the most frustrating issues I have with the Internet is that too many people think they’re experts. Especially when it comes to real estate and mortgage information and advice, novices have no business trying to counsel the public. So, after reading one particular article (on a real estate site, no less) that was filled with misinformation, I’ve decided to bust the common myths about private mortgage insurance.

First, an explanation

Private mortgage insurance, known as PMI, is a type of insurance that protects the lender if the buyer defaults. It is a requirement if you won’t be paying at least 20 percent of the loan amount as a down payment (unless you are using a VA loan, in which case there is no PMI required because the Department of Veterans Affairs guarantees repayment).

PMI rates vary, depending on how much you put down and your credit score (which reflects, at least to the insurer, how high of a credit risk you represent). Rates also vary among insurers.

Myth number 1: "You will have to come up with 20 percent of the purchase price as a down payment if you want to escape the PMI trap."

Calculating how much you’ll need to put down on a home loan is a bit trickier than merely figuring out what 20 percent of the purchase price amounts to.

The down payment is the result of the difference between the sale price of the home and your loan amount. Suppose you calculated your 20 percent down payment on a home you’re purchasing for $150,000. You would assume that you need $30,000 to avoid paying for PMI. Right?

Let’s assume you then decide to finance $3,000 of your closing costs. Your loan amount is now $123,000. The difference, in this case, between the sales price of the home ($150,000) and the loan amount is $27,000, which is only 18 percent of the home’s value. You will still need to either increase the amount of your down payment or purchase PMI.

Myth number 2: "PMI is only required on conventional loans, not for those backed by the government."

As mentioned above, the only government-backed mortgage that comes without a PMI requirement is the VA loan. While a USDA mortgage doesn’t require PMI, per se, it does require protection in the form of an upfront fee of 2 percent of the loan amount.

FHA-backed mortgages, on the other hand, require the purchase of up-front MIP (for “mortgage insurance premium), the FHA’s version of PMI. The current premium amounts to 1.75 percent of the loan amount. Then, you will pay a monthly premium, which varies according to certain criteria.

Myth number 3: "PMI premiums aren’t tax deductible like mortgage interest is."

For the tax year 2016, PMI for a primary residence, purchased in 2006 or later, is 100 percent deductible as long as the borrower’s adjusted gross income does not exceed $100,000. If you make more than $100,000 your deduction will be reduced and if your AGI is $109,000 or more you cannot take the deduction.

This deduction is for conventional as well as government-backed loans with mortgage insurance.

Myth number 4: "You won’t have to pay PMI forever. Once you reach 20 percent equity in your home, you can ask the lender to remove the PMI requirement."

While this is true with a conventional loan, if you have an FHA loan you can plan on paying the MIP for the life of the loan.

Of course rules change, so speak with your lender if you have any questions about private mortgage insurance.



Posted by Jolenta Averill on
Email Send a link to post via Email

Leave A Comment

Please note that your email address is kept private upon posting.