Whether you’re a new or even experienced real estate investor, the process of buying an investment property can be so confusing that it will make you dizzy.
Trust me: so many contracts, new vocabulary terms and paperwork that you’ll get vertigo unless you are completely prepared.
And I don’t mean bringing dramamine!
That’s why I wanted to write this article on private mortgage insurance.
From all the conversations I have with fellow real estate investors, this one is brought up a ton: what is private mortgage insurance?
Do I need private mortgage insurance?
Is it a scam?
How can you avoid private mortgage insurance?
Keep reading to find out alls you need to know about it!
What is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is a safety net, only it’s for your lender, not you. If you default on your loan, PMI steps in to protect them.
Keep in mind that buying this insurance is required when you assume a mortgage and make a less than 20% down payment.
What are the advantages?
PMI allows you to get into a property sooner without waiting to save up a hefty 20% down payment. This means you can leverage your investment potential and start building equity faster. Plus, in a competitive market, acting swiftly can spell the difference between securing a property and missing out.
But keep in mind that Private Mortgage Insurance adds an extra cost to your monthly mortgage payments, which can affect your cash flow and overall returns.
Got it?
Now, for the other downsides.
While Private Mortgage Insurance helps you get your foot in the door, it also means you’re paying for insurance that only benefits the lender, not you.
Also, the cost of PMI can vary based on your credit score and loan amount, potentially making it a more expensive option in the long run. This added expense can impact your investment’s profitability, especially if property values don’t appreciate as expected.
Weigh these costs against the potential gains from entering the market earlier.
How Much Does Private Mortgage Insurance Cost?
Aahhh, the nitty-gritty.
Usually, Private Mortgage Insurance costs between 0.3% and 1.5% of your original loan amount per year. Sometimes, it can go as high as 5%.
Got a $300,000 loan?
You’re looking at $900 to $4,500 annually. Yikes!
How do you pay for this delightful expense?
- Monthly Premiums. Tacked onto your monthly mortgage payment. Like a little gift every month, except it’s neither fun nor a surprise.
- Upfront Premium. Pay the whole amount at closing. Perfect for those who love to get it over and done with, though be ready to pay a higher rate.
- Split Premium. A mix of both — part upfront, part monthly. The best of both worlds… or the worst, depending on how you look at it.
Your specific PMI cost will depend on:
- Credit Score. Higher score, lower cost. Think of it as a reward for being financially responsible. Time to check that FICO!
- Loan-to-Value Ratio (LTV). This is your loan amount divided by your property’s purchase price. The higher your down payment, the lower your LTV, and the less PMI you pay. Simple math. Makes sense.
Private Mortgage Insurance isn’t exactly a free ride, but it might be worth the fare depending on your situation.
And you’d be delighted to know that your lender is mandated by law to automatically cancel it the moment you’ve settled 22% of your loan.
Also, you can request them for cancellation when you’ve paid 20% of your loan balance.
Factors that Influence Private Mortgage Insurance
Aside from your credit score and LTV, several other factors affect the amount you’ll pay for Private Mortgage Insurance.
Here’s a quick rundown:
- Loan Amount. Bigger loans often come with higher PMI costs.
- Loan Term. Shorter terms can sometimes reduce PMI rates.
- Type of Loan. Conventional loans, FHA (Federal Housing Administration) loans, VA (Department of Veterans Affairs) loans — all have different Private Mortgage Insurance rules.
- Home Appraisal. Increased value of a property based on a professional’s assessment may significantly lower PMI cost.
- Home Equity. PMI rates may decrease after a certain period with increased equity through improvements on the property, a higher market value, or paid down mortgage.
- Occupancy Type. Pay a lower PMI if you, as the owner and borrower, will take up residence in the property and higher if you declare it as a rental or an investment.
Now you know what you’re up against when calculating that quirky Private Mortgage Insurance cost.
When to Use Private Mortgage Insurance for Your Investment
There’s the million-dollar question!
When should you actually consider this PMI thing?
- Short in Cash for Down Payment. Don’t have 20% to put down? PMI can be your BFF, letting you snag that property without waiting for eons to save up.
- You’re an Eager Beaver. Impatient to dive into the real estate game? PMI helps you do just that.
- You’re Confident. Think that property’s value is gonna shoot up faster than a rocket? PMI can be a smart move, giving you a way to get in now and say goodbye to PMI later.
Do you hear your potential investment property calling your name? Make a Nike on Private Mortgage Insurance — Just Do It.
When NOT to Use Private Mortgage Insurance for Your Investment
Eyeballs here! This info might save you a lot of headaches later.
Here are real estate investment instances when you simply can’t or shouldn’t shake hands with PMI:
- You Have 20% Down. If you’re ready to roll, why pay extra? Ditch PMI and use that cash for something fun, like your next investment. Or maybe a new hammock for stress-free pondering.
- Risky Market. Investing in a market that’s shakier than a wobbly table? Skip PMI. The last thing you need is extra costs when your property’s value is taking a nosedive.
- Long-Term Hold. Planning to hold onto your property for the long haul? Save up for a bigger down payment and avoid PMI altogether. Patience is a virtue, after all.
- Low-Cash Reserves. When your bank account’s feeling a bit anemic, adding PMI to your overhead might not be the wisest move. You’ll need that extra cushion for unforeseen expenses or opportunities.
- Alternative Financing. Got access to other financing options? Sometimes, tapping into creative financing methods can help you dodge PMI. We love a clever loophole!
Are any of these scenarios ticking your boxes?
Then giving Private Mortgage Insurance a pass might just be the smarter move for your investment strategy.
The Bottom Line: Private Mortgage Insurance with Real Estate Investing
So, should you use Private Mortgage Insurance for your real estate investment?
Well, as you have learned, it can be a valuable tool for getting into property investing without a hefty down payment.
But it also has its quirks.
Here’s the scoop:
- Pros. Faster entry into the market, potential for property appreciation, and more investment opportunities.
- Cons. Added monthly expense, possible financial strain, and the need for good credit to keep costs low.
- Short-Term Strategy. If you plan to sell or refinance soon, PMI could be a temporary spend worth bearing.
- Long-Term Plans. Are you in this for the long haul? Then you might want to reconsider.
Private Mortgage Insurance isn’t a one-size-fits-all. Rather, it’s like that multi-tool in your garage — great for some tasks, not so much for others.
If PMI aligns with your strategy, embrace it! If not, look for other financing options.