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How to Avoid Private Mortgage Insurance

When you purchase a new home, your loan officer will walk you through the procedure and will mention a variety of things that you must pay for as part of the loan.  One of these things is Private Mortgage Insurance, or PMI.  This insurance also goes by other names; with an FHA loan it is called MI, with the VA it's a Funding Fee, and with a conventional loan it is the PMI. Because not every loan requires PMI, you may want to shop around for a loan that doesn't insist that you have it. 


PMI is usually required by lenders when the loan you want is more than 80% of the value of the house.   This means that it is really an insurance designed to protect the lenders who loan to people who have less than a 20% down payment.  Because this is such large amount of money for people to come up with before purchasing a home, both the Federal government and private insurance companies began to insure the risk that lenders would take if less than the 20% was included as a down payment.  As you can see, this insurance protects the lender, but is purchased by the borrower. 


If you are looking at a new home loan or even a mortgage refinance, this 20% rule will apply to you.  Your options with a new home would be to have large down payment or to get a second lien.  However, if you are looking at a bad credit mortgage, the second lien is not an option.  For a conventional loan, a second lien may make sense because a portion of the money paid each month pays down the principal, while all of the payment on PMI goes to the insurance company. 


When you are doing mortgage refinancing, the 20 percent rule will still apply.  You don't have to have the money as a down payment, but you can only borrow up to 80% of the value of the home.  If your property value isn't high enough, PMI will be required.  You may find that the new lower loan payment amount added to the monthly PMI is not worth mortgage refinancing. 


You should remember that if you had to purchase PMI, if the market value of your home increases so that you have at least 20% equity, you can drop the PMI.  Because you are constantly paying on the principal and your home is more likely to increase in value than to decrease, it is good to know that you won't have to pay PMI forever.