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If you’re about to buy a home, a down payment is what you need to put in. But if it amounts to less than 20%, you will have to purchase PMI or Private mortgage insurance policy even if it protects the lender and not you.

Getting a PMI isn’t always a good decision for all home buyers. Given below are 4 such reasons why you should take out a mortgage without paying for PMI.

PMI Costs:

What you pay for buying the PMI policy is 0.5-1% of the mortgage amount. Say for example, you have taken a loan of $150,000. The costs of PMI for such a loan will be maximum $1500 (1% of loan amount), that is, $125 on a monthly basis. Now, if the average home price is around $250,000, then one has to spend $2500 (1% of $250,000) on the insurance annually and $208 nearly ($2500/12) a month. And that’s almost what you may be paying on your auto loan each month! So, it’s better that you avoid going for the PMI.

Spending too much:

Home-buyers putting down less than 20% have to pay PMI. But they can cancel it when they build up 20% equity in their homes by making monthly loan payments. This takes a lot of time and that means the homeowner may be giving away a lot of money as PMI fees.

Say for example, you own a home worth $200,000 and instead of opting for PMI, if you can invest the monthly payment in a mutual fund and earn better returns, then that money would grow to a considerable amount within a significant period of time.

Premiums may not tax-deductible:

For the current year, premiums on private mortgage insurance are tax-deductible. Married people earning less than $110,000 and single tax filers earning less $55,000 annually can avail the tax benefit. But there’s no guarantee whether this would continue each year. So, it’s not sure as to whether one could avail tax benefits in the forthcoming years.

Payments continuous:

It happens often that the lenders may require you to sign a contract thereby asking you to pay for the PMI for a certain period of time. Now, it may so happen that the time period is much longer than that of the time when the home equity grows to 20%. Then in such a case, you will have to pay much more in PMI fees than expected.

No doubt, there are positive aspects of not going for PMI. At the same time, there are negatives too. One has to understand the pros and cons and then take the right decision.

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