Lenders require private mortgage insurance, or PMI, when you obtain a Conventional mortgage. It can cost you hundreds, even thousands of dollars each year. It is rather easily avoidable, however, by simply making different financial arrangements. Here are a few ways that you can get out of this extra financial burden.
Private mortgage insurance, is required if you borrow more than the necessary 80% of the loan to value (LTV) of the house. Once you go and borrow beyond this 80%, PMI becomes necessary. PMI rates are based on loan amount, location and credit scores.
Lenders look at loans larger than this value as being a greater risk to themselves. The private mortgage insurance is designed to offset their risk. However, what has actually happened, is that while it makes the lender more comfortable, it can also make it that much harder to get a mortgage because now the payments become larger to pay for the PMI. There are three ways around this problem.
*Make A Larger Down Payment
When you come up with the remaining 20% of the value of the house, you then make it unnecessary to pay the PMI. Simply by putting down this amount, you can save hundreds of dollars each year. Even if you have to borrow the money from a relative, the savings will make it worthwhile if you can produce cash at closing.
*Piggyback Loans
This is a recent feature among lenders to help people have a way around PMI. Instead of taking out one mortgage, you actually take out two. The first one is for 80% of the amount you need. Obviously, if you go more than this, you pay PMI. This becomes your first mortgage.
A second mortgage is taken out at the same time, as a piggyback on top of the other one, typically either for 10%, or even 15%, of the remaining balance. The amount not included in this amount is expected from you as a down payment. These percentages may vary with different lenders, but they will be similar.
*Reduce Amount Owed
Private mortgage insurance was designed to be required only when more than 80% is borrowed. When the loan is paid down to 78% of the original the PMI is automatically eliminated, and you must be current with your payments. (High risk loans may have different terms.)
If you already have a mortgage and are paying PMI, it would be worth it to make larger payments if you can just to be rid of it. Once you reach the 80% LTV, PMI can usually be removed soon after. You are required to have PMI for a minimum of 24 months.
*Increase in Home Values
Another option is to watch the housing market, once you have 20% equity due to the increase in home values you can have the PMI removed. Call your current mortgage servicer and ask what their policy is to remove PMI with a current appraisal. You may be required to pay for a new appraisal from the lender’s appraisal list.
A new construction home will have quicker equity growth than an existing home. As the builder sells homes, prices increase as costs and demand grow. Which in turn, causes your homes value to also to increase. Just another benefit of purchasing a new home!
–Dawn Kornovich
Tennessee Home Loans With Dawn 