How to Avoid Private Mortgage Insurance
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.