PMI is a monthly unwelcome guest that keeps coming back. It sounds like an acronym and is about as welcome as one. PMI is insurance for a private mortgage. When the amount of the primary mortgage is more than 80% of the property's value, the buyer pays for this insurance policy.
You will notice that the term "primary mortgage" was used. There's a reason for this. PMI is not based on the total amount of all mortgages and home loans on the property. Instead, it is based on the amount of the primary or largest mortgage.
PMI is worked out by dividing 0.5 percent of your main loan balance by 12. (12 monthly payments). For example, if your main mortgage is $200,000 and you have to pay PMI, your monthly mortgage payment will go up by $83.34. Most people who buy a home find this extra premium to be a big financial burden.
There are ways to avoid PMI if you can't put down at least 20% of the price of your new home. Mortgage lenders have put together loan packages with two or more home loans that, when added together, are more than the 80 percent limit, even though none of the individual loans are more than that. Most of the time, a primary mortgage and one or two home equity loans are taken out at the same time. These loans are usually between 81% and 100% (or sometimes even more) of the home's value. This lets the buyer put less than 20 percent down, or even nothing down at all, and it also gets rid of the need to pay PMI.
If you know you will be putting less than 20% down on your home, you should talk to your home lender right away about how to avoid PMI. A good home lender will tell you about packages like these. Even though the rules for these loan packages may be different from one state to the next, the vast majority of states do allow them.
When you look at this kind of package, you'll notice that the mortgage will always have a different interest rate than the home equity loan (s). The interest rate on the mortgage may be a little lower or even a lot lower. You should be able to figure out how much the monthly payments for the combined loans would be and then see if they are less than the monthly payments for a single mortgage with PMI. A good lender will only offer you the package if the payments are less than what you would pay for a single loan with PMI.
You can refinance the loans at any time and pay them off all at once. You would only do this if the home's value is more than 20% higher than the amount you plan to borrow. As the value of your home goes up over time or because you make improvements to it, you can get an appraisal and talk to your home loan expert to see if it makes sense to refinance the loans into one loan.
People sometimes call these kinds of loans "80-10-10 loans" or "80-15 loans," among other names. An 80-10-10 loan is made up of a mortgage for 80% of the amount being financed and two home equity loans for 10% each. With this kind of package, it's likely that all three loans will have different interest rates. 80-15 loans are similar, but the main loan would be for 80% and the second loan would be for 15%. The buyer would have to put down the other 5%.
It's important to remember that the appraisal is a key part of the loan approval process when you're financing 90–100% of a home or more. If the appraisal doesn't come out to a certain amount, the lender might think that the deal isn't a good one. You might have to go back and renegotiate the price of the house, or you might not get the mortgage. Most real estate contracts, on the other hand, do have a clause that lets the buyer back out if they can't get a mortgage. If you want to get this kind of loan, you should talk to the lawyers and the real estate agent ahead of time. Some contracts have clauses that say you need to qualify for no more than a certain percentage of a loan. If you are turned down for a loan at a higher percentage, this clause does not protect you.
Before you start looking for a home, you should have all of this information ready. By knowing how your financing will be handled, you can make sure you are protected during the transaction and also get a better deal since your financing is done or almost done. The key is to know ahead of time how much of the home's value you can and are willing to put down on your new home.
