When it comes to purchasing a property, coming up with a sizable down payment is one of the biggest hurdles for many home buyers. Most are trying to hit the 20% mark to avoid private mortgage insurance (PMI). While there are benefits to making a large down payment, this does not mean that you should use up all your savings to make come up with 20% initial payment.
PMI and Your Payment
Paying 20% or more of the home’s purchase price mean that you will able to avoid PMI in conventional mortgages. Primary Residential Mortgage, Inc. and residential home loan companies noted that PMI is a type of insurance that protects the lender in case you default on the mortgage. The sad thing about this is that it can increase your monthly payment, with the fees ranging between 0.5% and 1% of the original mortgage per year.
No Savings and Life on the Edge
While it is always better to avoid PMI, you should not empty your savings just to make a big down payment. Being left with no savings at all can put your life on the edge, especially at unexpected times. Keep in mind that having an emergency fund doesn’t just give you the confidence that you can handle unexpected events, but it will also help you avoid more debt and maintain your home.
When It’s Better to Pay PMI
If avoiding PMI means scraping all your money that you’ll be left with no rainy-day fund, it is better to pay for it. After all, PMI allows you to purchase a home even if you can’t afford the conventional down payment percentage. If you truly want to buy a house, but can’t afford a 20% down payment, you can either put off buying first to save more money or explore mortgages with low down payment.
PMI means an extra payment, but it is not necessarily a bad thing. This is because it provides the flexibility to put less money, without placing a big burden on your finances. There are still, however, pros and cons to examine, so it is best to consider all factors before making a decision. You may also want to talk to a reliable lender know the cost of PMI to determine if it makes sense for your financial situation.