PMI, or Private Mortgage Insurance, is a fact of life these days if a buyer wants or needs a mortgage to purchase a home that is greater than 80% of the purchase price. PMI insures the lender for the amount over 80% in case there is a default. Without this coverage, lenders would be hesitant to give a mortgage to anyone with a lower equity position. PMI simply reduces the lender’s risk.
A PMI pemium is based on the loan amount. Typically, on a median priced home, it adds about $50 to $100 per month to the house payment. That’s not a huge amount of money, and often well worth it in order to be able to purchase a home. PMI premiums however can add up to a lot of money over time. It’s good to know then that while PMI might be unavoidable for some, at least it’s something that doesn’t have to remain forever. Usually in about 5 years, the home has increased in value and the mortgage balance has been paid down enough that the combination of the two results in the mortgage balance being below 80% of the home’s value. Also, there may have been improvements or updates completed that have added value to the home further increasing the value. If this is the case, the homeowner can ask the lender to remove PMI. Due to laws passed in 1998, if the mortgage was obtained after then, the lender must remove PMI automatically. If someone feels they meet this criteria they can petition the lender to remove PMI without waiting for automatic removal. The lender typically will then order an appraisal. If the appraisal supports that the mortgage balance is below 80% then PMI will be removed.
There is a way possibly to avoid PMI altogether. Some lenders may offer a piggyback loan, like an 80-10-10. This is an 80% first mortgage loan plus an additional second mortgage for 10%, with the borrower investing 10% down payment, thus avoiding PMI. Some may even offer an 80-15-5 which would require only a 5% down payment. But sometimes the interest rate is higher for the second loan and/or it’s spread over a shorter amortization resulting in a total payment that’s actually higher than a single loan with PMI. You just have to do the math. There are income tax questions too that weigh in slightly. PMI is sometimes deductible and other times not, and everyone’s financial situation is different, so if someone really wants to fine-tune the answer on the differences or benefits of using a loan with PMI it’s best if they consult their tax professional or trusted financial advisor.
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