PMI
September 3rd, 2008 | 
Author: What is PMI?
PMI: Anytime an “A” paper bank (Banks which only deal with good credit and strong compensating factors- “Vanilla loans”) finances a home mortgage over 80% of the value of the house, PMI will most definitely be included into the monthly payments.
| Example: | $100,000 value of the house $20,000 down payment =$80,000 loan 80% loan to value (LTV) |
PMI is short for private mortgage insurance. This is different than home owners insurance. PMI is insurance you pay to the bank for the loan. PMI is only there to insure the bank against default. PMI is something you want to completely avoid, because it’s money that you never benefit from. It doesn’t go toward principle or interest. It’s like throwing money out the window. Depending on the loan amount and loan to value PMI can add up to $100’s per month. So how do you avoid paying PMI without having to put down 20% at closing? Piggy back loans or loans with B/C banks (Banks that don’t only deal with perfect loans)
| PMI Formulas: | LTV 80.01-85% 85.01-90% 90.01-95% 95.01-97% 97.01-100% |
Loan Amount x |
Multiplied by = .0275% .0433% .0650% .0800% 1.09% |
Monthly PMI = = = = = |
| Example: | $300,000 Purchase price -$10,000 Down payment $290,000 Loan Amount |
$290,000 Loan Amount $300,000 Purchase(value) |
= 97% LTV |
Multiply $290,000 by the 97% LTV formula of .08% = $232/month PMI
Now you see why avoiding PMI is so important. In this example, you would have to pay $232 per month on top of your regular mortgage; what a waste.
How do I avoid paying PMI?
Piggy Back Loans and B/C Banks:
Having a loan known as a piggy back loan or using a B/C Bank can help you avoid PMI.
| Example of a piggy back loan: | 80% first mortgage 15% second mortgage 95 % combined loan to value |
Since neither loan is over 80% loan to value you don’t have to pay PMI. You can get 80/10, 80/15, 80/20 loans or whichever combination fit’s your needs best. B/C loans are generally higher interest rate loans. Your payments might be equal to or lower then payments including PMI, but at least your paying down principal and interest with that money instead of insurance for the bank. In most circumstances, your payments should be lower with a B/C loan- verses a loan including PMI. You should go over these options with your mortgage professional or contact us to see which is best for you. If you have low credit scores you may have to automatically be put in a B/C loan anyway.
** Also read sections: Refinance My Mortgage, Debt Consolidation, Mortgage rates, Second Mortgages and Credit Scores.
Posted in PMI
April 3rd, 2009 5:14 am
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