Are you thinking about buying a home? It is a buyer’s market, because there are a plethora of homes for sale at great prices, and interest rates are still relatively low.
Of course, when buying a home, there’s a lot more to think about than just securing a loan and making house payments. You need to be cautious about the area where the home you buy is located, because even if the home is valued quite low when you buy it, when we finally get out of this recession, home prices will go back up, and you need to be sure that you can afford the property taxes you will be assessed. Another expense might be carrying Private Mortgage Insurance (PMI) if it’s required.
PMI is insurance you pay for that protects your lender’s money should you end up having the home foreclosed. You may think you’re getting a bargain when your realtor quotes you a small downpayment and affordable monthly payments, but many of them avoid telling buyers that if they only pay a little down, they will most likely have to carry PMI which is going to be tacked onto their monthly payments. Lenders have been left carrying the bag in many instances during the foreclosure crisis, and they want to be assured that if they have to foreclose on you, they’ll be able to sell the property and make up any shortfall between the selling price and the outstanding debt. Thus, PMI.
There are some situations in which you won’t have to worry about PMI. These include if you take out a VA or FHA loan which doesn’t require the insurance, and if you are able to make a downpayment of at least 20% of the home’s value. Any time your equity in a home is at least 20%, you shouldn’t have to carry PMI. Equity is the amount of the current value of the home as opposed to the amount you still owe. With the recent drop in home prices, many people have found themselves “under water”, because they ended up having a negative equity in their home. That means that they still owe more than the property is worth.
Every case is different, though, so you will want to discuss your options with both your real estate agent and your lender to see if you will qualify for a loan without having to pay extra for PMI.
By Bruce Fong