Lenders are normally protected from the risk of default and foreclosure by an insurance mortgage policy known as the (PMI) Private Mortgage Insurance. This program is made for buyers with the funds to make a significant down payment or some buyers who won’t consider making a down payment and get affordable rates for their mortgage finance terms. A PMI is normally acquired when a buyer makes a home purchase with a down payment below 20%, the lender will probably require you to get insurance from a PMI after approving the loan to minimize risk.
The PMI normally relies on your mortgage percentage that must be paid on monthly basis. It amounts will usually vary according to your loan amount and your credit risk. Since the period of the housing crisis, several banks are becoming more reluctant in lending to homeowners who might be at risk of default or foreclosure, but for those who would meet the requirements to feet in the category, you will be asked to have a PMI. The PMI created to protect the interest of banks and lenders. It helps lenders recover just in case the borrower defaults on their loan and fall into foreclosure.
The PMI does not protect you the borrower in any way, it just comes after you when you fail to make payments and make you lose your home. This is not a homeowners insurance and was not made to protect your property is destroyed. It only helps the lender get their money back in case you default on payment. I’ll continue billow with options to help you avoid the PMI.
- Make a 20 % down payment: The first and most accurate way to avoid the Private Mortgage Insurance is by making a down payment of at least 20% of your home’s purchase price.
- A piggyback mortgage: This is one more option for qualified borrowers. In this case, there is a second mortgage or home equity taken out just as the first mortgage at the same time. With an “80-10-10” piggyback mortgage, where, for instance over 80% of the purchased priced is covered by the first mortgage. The second loan covers 10% and your down payment covers the last 10%. This brings down the loan-to-value (LTV) of the first mortgage to below 80%. This option eliminates the need for a PMI.
- Lender-Paid Mortgage Insurance (LMPI): In this option, the PMI cost is added to the mortgage interest rate for the term if the loan. This gives you the ability to sometimes end up paying more in interest over the loan time frame.