Look at the benefits and drawbacks of private mortgage insurance

You’ll be required to buy private mortgage insurance (PMI) when you can’t make 20% down payment on the purchase price of the home. This insurance is also referred to as personal mortgage insurance, lender mortgage insurance and principal mortgage insurance. PMI is basically a type of mortgage insurance that guards the lender against loan defaults. Go through the article to know about 2 benefits and drawbacks of private mortgage insurance.

Benefits of private mortgage insurance

Here are some benefits of private mortgage insurance that you should know:

1. Lender gets his money: It often happens that you’re not able to make mortgage payments due to sudden financial crisis. When you can’t afford to make home loan payments to the lenders or you default on your mortgage loan, then the insurance company (offering private mortgage insurance) pays the lender.
2. You can purchase a home without large down payment: One of the biggest benefits of private mortgage insurance is that it lets you acquire a house even when you can’t make the required down payment. Traditional mortgage loan require a home buyer to make at least 20% down payment. It takes years to save that amount of money. But by purchasing PMI, you can buy your dream home with small down payment immediately.

Drawbacks of private mortgage insurance

Here are some drawbacks of private mortgage insurance that you should know:

1. Costly: Private mortgage insurance is costly, and you’re required to pay for it. The premium amount of this kind of insurance can be as high as $1000 or even more. You can either pay the entire amount upfront or you can pay in installments. In case you decide to pay in installments, then it means that you have to pay insurance premiums plus mortgage interests each month. This will create additional pressure on you.
2. Have to pay for years: You might have to carry private mortgage insurance for several years. Basically, you’ve to carry this insurance policy till your mortgage loan balance becomes 80% of the purchase price of the house. This implies that you have to pay the premiums for a long period of time.

Finally, another drawback of private mortgage insurance is that premiums are not tax deductible. PMI insurers have been requesting the government to make the premiums tax deductible, but the leaders of US Congress are refusing to budge. The leaders of the Congress argue that PMI tax deductions will reduce income-tax revenue.