If you are trying to buy a home, you have probably heard of private mortgage insurance (PMI). But do you feel like you really understand why lenders charge PMI or how it is derived? Sunset Bank and Savings has some details about PMI and what you can do to avoid it.
What is PMI?
PMI is a kind of insurance that is paid to lessen a lender’s potential loss if you default on your mortgage loan. Simply put, if you stop making your mortgage payments, the lender will be able to recover their losses from the PMI company. The amount of required PMI coverage depends on your credit and the amount of your down payment.
How do I avoid paying PMI?
One way to avoid paying PMI is to make a down payment that is at least 20% of the purchase price of the home. When you purchase a home and put down less than 20%, your lender will probably minimize their risk by requiring you to buy PMI before signing off on the loan.
Another way to avoid PMI is a second mortgage. Home equity lines of credit (HELOC) is one option you have. HELOC is a line of credit with an adjustable rate. You are given a credit limit and, as the principal balance is paid, it becomes available for use. You may even have the option to pay only interest for several years.
A third option for avoiding PMI is lender-paid mortgage insurance (LMPI). With LMPI, the cost of the PMI is included in the mortgage interest rate for the life of the loan.
Private mortgage insurance may sound like an easy way to buy a home without having to save up cash for a down payment. However, there are several reasons that it should be avoided. Sunset Bank and Savings has a team of experienced mortgage lenders who can find the best solutions for you. Get in touch with Mike or Brian today!