If you’re thinking of buying a home, you know that it’s not a cost-effective option these days. Not only are mortgage deals more expensive, but a continued shortage of housing inventory has caused U.S. home prices to rise significantly.
I often hear that when taking out a conventional mortgage, it is good to make a 20% down payment on a home. reason? If he does not make a 20% down payment at closing, he will be subject to private mortgage insurance (PMI). Private mortgage insurance is an additional fee charged on top of your monthly mortgage payment (there are other ways to pay PMI, but monthly payments are the most common).
PMI may sound like extra protection, but don’t let the word “insurance” fool you. The purpose of PMI is to protect your mortgage lender if your mortgage payments are not made on time. Therefore, to avoid this, it is recommended to make a 20% down payment when purchasing a home. PMI may sound like extra protection, but don’t let the word “insurance” fool you. The purpose of PMI is to protect your mortgage lender if your mortgage payments are not made on time. Therefore, to avoid this, it is recommended to make a 20% down payment when purchasing a home.
Unfortunately, recent data from Realtor.com shows that while homebuyers are making larger down payments these days, many are putting less than the 20% threshold. And that means that on top of the generally high cost of home ownership, many people are blaming themselves for their PMI.
Why it pays to avoid PMI
Property – even more difficult to manage.
PMI is typically 0.5% to 1% of the mortgage amount. So if you take out a $240,000 mortgage, your PMI could be between $1,200 and $2,400 per year. That means an additional $100 to $200 per month. Imagine spending this extra money on top of your mortgage payments, property taxes, maintenance and repairs. That’s a lot to swing for.
Additionally, if his down payment is less than 20% at closing, he will have less equity in the home to begin with. If the real estate market declines soon after you purchase a home, you may find yourself in a situation where you default on your mortgage. This means that the market value of your home is less than the amount you owe from your lender. This can be a problem if, for example, you need to sell your home quickly to get a new job or deal with unemployment.
So if you don’t have enough money for a 20% down payment, you may want to consider buying a cheaper home or delaying homeownership. That’s not to say paying PMI over a period of time is the worst thing in the world. However, it is an additional expense that you may be able to avoid by lowering your expectations when purchasing a home or by waiting a few months.
If you don’t want to do that, know that you’re not the only one paying PMI. However, please budget for these costs accordingly. Find out what your PMI will be and see if you can afford this cost on top of your other homeownership costs.
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