Mortgage & Credit >> Mortgage Process >> Avoiding PMI
Private Mortgage Insurance - Can You Avoid It?
by Brandon Cornett
When your down payment on a home is less than 20%, your lender will require Private Mortgage Insurance (PMI).
This is a monthly insurance fee you'll pay in addition to the mortgage payment. PMI protects the lender in the event that you default on your loan.
Those numbers are important, so here they are again. PMI is mandatory when your down payment is less than 20% of the home's value (or in other words, when your loan is more than 80% of the home's value). In this case, you will have to pay PMI until you have over 20% equity in their home.
Avoiding PMI
Some home buyers find it difficult to afford mortgage payments when Private Mortgage Insurance is added to it. The lending industry knows this, so they've created unique options to avoid PMI in the first place.
These special financing packages are referred to as 80/20 loans, 80-10-10 loans, or 80-15-5 loans. They include a primary loan amount not to exceed 80% of the home's value, plus one or more home equity loans to cover the remainder of the purchase price (minus whatever down payment the buyer is making).
In most cases, the interest rate will be higher on the secondary loans than on the primary loan. But the removal of PMI from the equation will lower the total monthly payments owed. Also, as you gain equity in your home by paying your mortgage every month, you'll later have the option of refinancing everything into one mortgage (possibly with a more favorable rate).
Creative Financing
Many home buyers can avoid PMI by using the financing options listed above. Though these are "creative" financing options, they are all perfectly legal and ethical. They simply use the system in a way that helps people get into homes without worrying about extra fees like private mortgage insurance.
If you're in a situation where you have to pay PMI, you will continue to pay it until you earn 23% or more in home equity (not the 20% that is the initial trigger). You should consider this factor when comparing mortgage loans.
Your accountant or financial advisor can help you do the math and determine which path makes more financial sense for you -- paying PMI, or avoiding it.
Ask About PMI Early
Make sure your lender goes over PMI with you. Ask them if it's part of their good faith estimate, or if it might be added on later. That way, you'll have no unpleasant surprises on closing day. Some lenders will take the initiative to discuss PMI with you. But if they don't, you should raise the issue yourself.
Brandon Cornett is the editor and publisher of Home Buying Institute.
