PMI mortgage insurance

What is PMI and why do you have to have it?

PMI is Private Mortgage Insurance. It is insurance that a lender or bank makes you get when you borrow over 80% of the value of the home. The more you borrow over 80 % the bigger the risk you are. So the bank makes you take insurance out to cover their risk.

The more you borrow the higher the PMI. Different banks determine PMI differently based on the type of loan, the length of the loan, and the percentage of loan as compared to the purchase price of the home. This is called LTV ( loan to value). If you borrow 95% as compared to 85% the PMI is going to be higher on the 95% because you are a bigger risk.

The only way you can get rid of PMI after you get it is to refinance out of it or pay your principal balance down on the loan to 78%. You cannot get an appraisal showing that the value of the home went up. (Even if the amount you owe is only 78% of the market value of the home). The only exception to this is if you did capital improvements to the home such as an addition. Then you have to document the improvements and get an appraisal done. Many times the bank requires you to use their appraiser or an appraiser on their approved list. So you are going to have PMI for at least 5-10 years usually.

So before you get a loan with PMI look at all your options. Some banks and lenders offer a loan with a higher interest rate where the PMI is built into the price. (There is no actual PMI but you are paying a higher interest rate). Or you can split your loan into 2 parts. You can do an 80% loan and then do a 2nd mortgage for the rest.

Let’s say that you want to borrow 95% on a purchase price of a $200,000 home.
You would be borrowing $190,000 total. You would split the loan into an 80% 1st mortgage of $160,000 and a 2nd mortgage of $30,000. You are still borrowing the same amount but split into two loans. The first mortgage is usually at a good rate and the 2nd mortgage is at a slightly higher rate.

When you borrow over 80% of the value of the home (or purchase price). You have three choices.
1) One loan with PMI
2) One loan with a higher rate that basically has the PMI built into the rate
3) Two loans. A first mortgage and then a 2nd mortgage with a slightly higher rate.

PMI is usually not tax deductible but in 2007 it was. It will be up to the law makers on how long it will stay tax deductible.
The bottom line is that you need to have your mortgage person (i.e. Russ Ravary) run the scenarios for all three. The one with the least expensive payment is usually the way you want to go. That is if PMI is still tax deductible, the lengths of the loans are the same, and the rates are fixed. (sometimes the rates on the seconds can be variable, be sure it is a fixed rate)

If you want more information on mortgages go to my website Michigan mortgages www.russravary.com. To to search Michigan homes in the privacy of your home at your convenience go to www.russravary.com

May your work week fly by and your weekend seem to last forever.
Russ Ravary
"your one stop mortgage and real estate specialist"