5 Reasons to Avoid Private Mortgage Insurance

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Private Mortgage Insurance, or PMI, is a required fee when you take out a home loan that accounts for more than 80% of your property’s total value. This protects your lender against default.

You can avoid having to pay for Private Mortgage Insurance simply by contributing a deposit of 20% or more towards your purchase. This can offer many benefits that set you up for financial success as you begin your home ownership journey.

If you can, it’s usually best to avoid having to pay for PMI. Here are 5 reasons why!

1. Private Mortgage Insurance can be expensive

No one wants to pay more than necessary to purchase a property. Private Mortgage Insurance can be expensive when you consider ongoing costs that will apply over the course of your loan. Even if your PMI costs only a small percentage of your total loan amount annually, you could end up paying thousands before you are eligible to cancel PMI.

2. You’re missing out on investments

Often, investment opportunities can be an effective way to build your wealth. Unfortunately, paying for PMI can make it more difficult to pursue investments. Instead of investing your money and earning more, you’ll be paying unnecessary funds to your lender. What’s worse is that the PMI you pay won’t go towards your loan itself, so it won’t help you pay back your debt any faster.

3. PMI payments are not tax-deductible

In some cases, mortgage interest can be tax-deductible, but this is not usually true for Private Mortgage Insurance. This means that you’ll be paying out without any financial rewards at tax time. You can’t claim back the money you’ve spent on PMI, so you won’t benefit from any reduction to your tax bill, even as you continue to pay more for your property.

4. Payments could be under contract

Most lenders have a threshold in place for PMI. When you reach this, usually 20% equity, you are eligible to stop making PMI payments. With some lenders, though, Private Mortgage Insurance may involve a contract with a predetermined time period. This means that you could be locked in to paying for PMI on an ongoing basis, even if you have surpassed the equity threshold. This is why it’s so important to read the fine print!

5. Cancelling can be a challenge

Generally, you will be allowed to stop paying for Private Mortgage Insurance when you have paid back enough of your loan amount so that your equity is over 20%. However, with many lenders, cancelling PMI payments can be difficult and time-consuming. You may even need to pursue a property appraisal to prove that what you have paid back really is over the required amount. This can be a costly and stressful process, and you could end up paying PMI for longer than you have to.

Need support making decisions about your home loan? We can help! Contact the team at Our Top 10 to find the best mortgage broker Sydney has to offer.

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