PMI can be a good option for those who cannot afford the 20% down payment and it enables them to purchase their dream house with enough loans and within a short period of time. However, PMI is designed to protect lenders from borrowers’ default and there are several reasons about why participants should avoid PMI.
1. huge cost
PMI generally will cost 0.5% to 1% of the entire loan amount annually. According to Zillow, the average listing price of house in the United States is around $285,000, which means that the average cost of PMI can reach $3,420.
2. not deductible
Before 2017, participants whose adjusted gross income that was less than $110,000 can enjoy tax deduction. However, after the United States has imposed Tax Cuts and Jobs Act, no one can get tax deduction from PMI.
3. no compensation
When participants purchase insurance, they always assume that if they die, their spouses or children can get some compensation. However, they cannot gain that benefit with PMI since it was established to protect lenders, not borrowers. If borrowers die, all the compensation will go directly to lending institutions. To get such compensation, borrowers should purchase another insurance.
4. wasting too much money
Participants who cannot make the 20% down payment have to purchases PMI yet their monthly payment costs so much and they waste a lot of investment opportunities. For example, the average listing price of house is $285,000, thus participants have to pay $285 per month. In this case, if participants use the money to invest in a mutual fund, they can gain a considerable amount of money. Suppose the mutual fund they invest in has an annual return rate of 10%, thus they can gain the profit around $342 per year and $3,420 in ten years.
5. hard to cancel
According to the terms of PMI, if participants’ equity has reached 20%, they can remove their PMI. However, many lenders will ask the borrowers to evaluate the current value of their house before cancellation, which can take several months. Meanwhile, some borrowers are required to sign a contract with lending institution at first in order to oblige them to pay PMI for a certain period of time. Under this circumstance, even if borrowers’ equity is above 20%, they have to pay PMI until the designated time.