What is PMI (Private Mortgage Insurance) and Why is it Important?

Private mortgage insurance (PMI) is a type of insurance policy that protects lenders from the risk of default and foreclosure, allowing buyers who are unable to make a significant down payment to obtain mortgage financing at affordable rates. If you purchase a home and put down less than 20%, your lender will minimize its risk by requiring you to buy insurance from a PMI company prior to signing off on the loan. As the borrower, you end up paying the PMI premiums but your lender is the sole beneficiary. If you have monthly PMI, you continue to make PMI payments every month until your PMI is either terminated (when your loan balance is scheduled to reach 78% of the original value of your home); when it is cancelled at your request because your equity in the home reaches 20% of the purchase price or appraised value (your lender will approve a PMI cancellation only if you have adequate equity and have a good payment history); or when you reach the midpoint of the amortization period (a 30-year loan, for example, would reach the midpoint after 15 years). Borrowers usually have to pay PMI when any single loan accounts for more than 80% of the appraised home value. The key word here is “single.” But what if you used two separate mortgage loans

to pay for the house? This is a common strategy used by home buyers who have less than 20% saved up for a down payment. For example, you could use an 80-10-10 mortgage to buy a house, and you wouldn’t have to pay for a PMI policy. Here’s what those numbers represent: • 80 = The first mortgage would cover 80% of the purchase price. • 10 = The second home loan (also called a “purchase money second”) would cover 10% of the price. • 10 = You, as the borrower, would pay the remaining 10% out of pocket as a down payment. In this “piggyback” financing scenario, no single loan accounts for more than 80% of the price. Therefore, you wouldn’t have to pay for PMI protection, even though you are putting less than 20% down on the home purchase. How can you avoid paying PMI? You can avoid paying PMI by making a down payment that is at least 20% of the purchase price of your home. There are many ways to consider but it is also a good idea to talk to someone in the mortgage industry who has knowledge regarding this type of insurance. Contact Steve Head, President and owner of Texas Premier Mortgage at 281-627-4222. Available 7 days a week, he is highly educated on this and many other mortgage concerns you may have.