Little did you know before setting out to find a mortgage lender for your prospective new home, you would have to learn an entirely new language?  Unbeknownst to many, the lending industry has an idiom all of their own!  Whether it’s the ‘LTV’, ‘FHA’ ‘VA’, ‘ARM’ or ‘PMI’, I assure you, you will quickly learn to translate.

Let’s focus on the PMI.  This is a term many homebuyers find themselves facing; but what exactly is it? PMI, otherwise referred to as Private Mortgage Insurance, is an insurance you may find yourself paying in addition to your monthly mortgage payment.  Being told you will have to pay Private Mortgage Insurance might take you back to the days of dodge ball and being picked last for the teams; you will likely feel singled out and perhaps insulted.  While Private Mortgage Insurance is not meant to cause offense, it is intended to protect.  Now that you are feeling better, knowing that you will be paying a Private Mortgage Insurance for the purpose of protection, I need to inform you that the PMI is not meant to protect you; nonetheless, it acts as a guardian for the bank.  How, you ask? Very simply; should you default on your loan for any reason; Private Mortgage Insurance protects the bank against monetary loss.  As I said, PMI is not a randomly assigned fee; however, it does have specific criteria.

 

Private Mortgage Insurance is an imposed premium on a home loan that lacks a total down payment of 20% of the purchase price; example being a loan that is more than 80% of the purchase price of your new home.  Any prospective home buyer that is not able to put at least 20% down at the time of their new home purchase, will be required to pay a monthly Private Mortgage Insurance premium until they have exceeded the 20% in home equity value, at a 23% equity earnings.

 

Is it possible to evade Private Mortgage Insurance all together? The simple, Reader’s Digest answer suggests that you wait until you have adequately saved the 20% you will need for the purchase of your new home.  This, however, is far easier said, than done.  Alternatives to PMI are available, but very few.  These substitutes for PMI should also be approached cautiously and intelligently.  Private Mortgage Insurance can ultimately put a halt to your home buying process.  Should this be an issue for you, inquire about an 80-10-10 loan or an 80-15-5 loan.  These particular options provide a primary loan not to surpass 80% of the value of the prospective home, in addition, one or possibly more, home equity loans to cover the remaining purchase price of the value of the home. In this case, any down payment is perceived as better than none.    

 

While Private Mortgage Insurance is not the end of the world, it is a looming fee to be paid until you meet the 23% equity requirement.  Researching and thoroughly investigating creative financing options is recommended; perhaps your accountant or a financial advisor can educate you on the lesser of the two evils when it comes to Private Mortgage Insurance; do you choose the multiple loan option or adhere to the mandatory PMI upon the purchase of your home? Only you can, make that final assessment.