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Avoiding PMI
By: Max Hunter iSnare Expert Author
PMI - a recurring, monthly, unwelcome guest. It sounds similar to and is about
as welcomed as a similar acronym. PMI is private mortgage insurance. This
insurance policy is paid for by the homebuyer when the amount of their primary
mortgage is greater than 80% of the value of the property.
You will note that the term "primary mortgage" was used. This is for a specific
reason. It is not the total of all mortgages and home loans on the property that
is evaluated, but rather the amount of the primary or largest mortgage on the
property that can trigger PMI.
PMI is calculated by taking 0.5% of your primary loan balance and dividing it by
12 (12 monthly payments). For example, if your primary mortgage is $200,000 and
you are required to pay PMI, your mortgage payments would be an additional
$83.34 per month. For most homebuyers, this additional premium is a considerable
financial burden to undertake.
There are ways around PMI for those homebuyers unable to put down 20% or more on
their new home. Mortgage lenders have created loan packages which include two or
more home loans that when combined exceed the 80% threshold, while no one of the
loans exceed that threshold. Typically there is a primary mortgage and either
one or two home equity loans taken out simultaneously which are 81% - 100% (or
sometimes more) of the home value. This affords the homebuyer to put less than
20% down, or perhaps put nothing down at all while at the same time eliminating
the need to pay PMI.
If you know you are going to be putting less than 20% down on the purchase of
your home you should immediately speak to your home lender about avoiding PMI. A
good home lender will inform you about these types of packages. Though the rules
on these packages may differ from state to state, the vast majority of states
allow for these types of loan packages.
When you review this type of package you will note that there will invariably be
a different interest rate on the mortgage than there is on the home equity
loan(s). The mortgage rate may have a slightly lower interest rate or perhaps
even a considerably lower interest rate. You should be able to calculate what
the monthly payments would be for the combined loans and then determine if it
comes out less than a single mortgage with PMI. Obviously, a good lender is only
going to present you the package if the payments are cheaper than a single loan
with PMI.
You are able to refinance the loans at any point and combine them into one
payment. You would only do this when the value of the home is more than 20%
above of the amount you will mortgage. As the value of your home increases
through home improvements or time, you can receive an appraisal and speak to
your home loan professional to determine if refinancing the loans into one loan
makes sense.
These types of loans are often referred to as 80-10-10 loans or 80-15 loans,
among other names. An 80-10-10 loan is a mortgage at 80% of the amount to be
financed and than two home equity loans at 10% each. You will likely find that
all three loans will have a different interest rate with this type of package.
80-15 loans are similar but would be the main loan at 80% and a secondary loan
at 15% with the buyer putting down the additional 5%.
It is important to note that when financing 90% - 100% of a home, or more, the
appraisal will play a key role in the loan approval process. If the appraisal
does not come out at a pre-determined amount, the lender may feel that the
transaction is not a sound one. You may need to go back and renegotiate the
purchase price of the home or run the risk of being denied the mortgage. Most
real estate contracts, however, do have a clause in them that allows the buyer
out of the contract if they are denied a mortgage. You will want to speak to the
lawyers and real estate agent in advance if you are planning for applying for
this type of loan. Some contingency clauses in contracts specify a maximum
percentage of a loan you need to qualify for and if you are denied for a loan at
a higher percentage you are not protected by this clause.
It is important for you to have all of this information in place before you
start your home search. By knowing how your financing is going to be handled you
will be able to make sure you are protected in the transaction and you will also
be able to negotiate a better deal since your financing has been completed or is
close to being completed. The key is knowing in advance what percentage of the
value of the home you are able to and willing to put down on your new home.
About the Author:
Max Hunter is the author of many credit related articles. If you are looking for help with Home Loans or any type of credit issue please visit us at http://www.homeloanave.com |
