Home ownership is a tricky question that increasingly less young people are bothering to answer, but for those who take the leap, there are some pitfalls to lookout for.
Case in point: “No PMI” mortgages. To the fresh and eager, PMI stands for Private Mortgage Insurance, a wonderful charge applied to loans where the debtor puts a down payment of less than 20 percent on the overall price. It might not be a whole lot, but evading monthly expenses is usually a good thing.
Almost too good. As it turns out, lenders that will let you avoid that added cost are just trying to reel the line in. Sure, there is no PMI officially on the statement, but they will simply RAISE your rate offer to compensate.
For instance, say the prevailing interest rate for a conventional fixed loan of $200,000 is 3.75 percent. Normally, you would get a PMI of 0.5-1 percent, so between 83-166 dollars monthly.
Because the banker is a wonderful human bean, he will waive the PMI fee, whilst jacking up the mortgage rate to 4.75 percent.
So yes, you do “save” by not paying PMI. They just take it out (with interest) and give a big smile.
It’s all about the numbers.