In recent years, consumers have grown overwhelmingly reluctant to purchase a new home, and for good reason. Although property values and mortgage rates are at all time lows, unemployment is at an all-time high. This is consistent throughout the United States, where families feel a greater level of anxiety each day about the consequences of purchasing a new home if their income changes significantly in the near future. Fortunately, these households do have a reasonable option in protecting themselves against such a scenario: private mortgage insurance (PMI). You can check out the International Mortgage Trends Report to find even more information on homebuyer sentiment across four continents.
What is Private Mortgage Insurance?
With Private Mortgage Insurance, potential homebuyers are protected against losing their home due to loss of income. Most PMI plans include job loss protection standard for all insurers guaranteed to protect their mortgage in the event that they are terminated from their job (this coverage is not available for those that voluntarily quit). With this type of policy, buyers can feel confident purchasing a new home years before they would have otherwise been able to, even with a small down payment. In the event that they are unable make monthly payments, homeowners can access a host of services provided by their insurer to prevent foreclosure.
What Does PMI Offer?
A homeowner assistance program is also available with PMI policies. During times of reduced income that do not result in unemployment, financial counseling will be provided to help homeowners shift the terms in their loan plan to accommodate their new income level. This type of assistance is also available if one out of multiple workers in the household loses their job or an emergency occurs that has an effect on the borrower’s ability to make monthly payments.
PMI also provides a viable alternative to a second loan. Taking out another mortgage on an existing home could be detrimental to homeowners. High interest rates typically accompany such loans, meaning that buyers could be paying a significantly higher payment each month. It will usually also have significant negative impacts on the credit score of the borrower, potentially increasing the rates on other lines of credit and restricting access to new ones. Additional paperwork and other time-consuming hassles will also become necessary. And despite all of this, a foreclosure is still only one small mistake away. All of this will be eliminated by opting instead for a PMI policy. It is just safer and smarter to utilize mortgage insurance.
How Much Does PMI Cost?
Monthly PMI payments are also lower than most consumers may think. It has become a competitive field and providers are always searching for the most discounts available to each client. This may lead to the inclusion of some services and the removal of those less relevant for a particular situation. This rate can be lowered even further if the consumer completes financial courses prior to purchasing a new home.
But the savings don’t stop there. Depending upon the household income level, some new homeowners may qualify for additional tax credits just by investing in a PMI policy. This provides an excellent opportunity to pay down a significant amount of the household’s total debt during tax season, which, in the long run, may qualify the household for a lower mortgage rate. Some clients will also qualify for rebates, depending upon the specific terms of their plan. After the buyer has had a few years to determine that their income is safe and protection is no longer necessary, they may end their policy without negatively impacting the terms of their mortgage.
Information for this post was sourced from Genworth Financial.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
SB @ One Cent At A Time says
I think if you pay a sizable down payment upfront you don’t have to get a PMI.
Robert says
Yes, usually if you exceed 20% down, it isn’t required by the lender. It is important to note that you can still purchase PMI to insure yourself should something occur. When it is required, the lender is the beneficiary, and you pay the premiums as insurance to them.