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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!
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.
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?
Your specific PMI cost will depend on:
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.
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:
Now you know what you’re up against when calculating that quirky Private Mortgage Insurance cost.
There’s the million-dollar question!
When should you actually consider this PMI thing?
Do you hear your potential investment property calling your name? Make a Nike on Private Mortgage Insurance — Just Do It.
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:
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.
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:
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.
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