Private Mortgage Insurance requirements
Private Mortgage Insurance is a type of insurance that is required on most mortgage loans that do not have the required 20% equity in the home. If you are buying a home and do not have 20% for a down payment, you may be told that your mortgage will required PMI. This insurance helps to protect the lenders investment in the unfortunate case that you would happen to default on your mortgage loan. It does not provide any protection for you specifically, except it allows you to be able to obtain a mortgage loan if that is a requirement for the loan. There are some alternatives to obtaining PMI and some ways around it.
The PMI cost varies depending upon the size of the mortgage and the percentage of the down payment. If the down payment is more than 15 percent but less than 20 percent, the borrower will generally pay about 0.32 percent of the loan amount annually in PMI premiums. That totals about $40 a month for a $150,000 mortgage.
One way to get around Private Mortgage Insurance requirements, if you are buying a new home, is to obtain a combo loan, also known as an 80/20 loan or a 75/25 loan. A combo loan consists of 2 mortgages instead of one. By obtaining a combo loan your first mortgage will be for 80% or less of the purchase price of your home and the second mortgage will be for 20% or more, the remaining balance between the purchase price and the first mortgage, of the purchase price of your home. Combo loans are very common and one of the most popular ways to buy a home right now. You will have a lower payment by doing the combo loan with 2 mortgages than to pay the mortgage insurance.
Private mortgage insurance is now in many cases tax deductible, which makes it much easier to compare with combo loan alternatives.
Lender Paid MI underwriting guidelines are slightly more stringent than traditional programs with PMI. Be sure your mortgage professional reviews your debt ratio and the credit scoring criteria for an LPMI approval.
Some lenders offer a different type of mortgage insurance called LPMI, or Lender Paid Mortgage Insurance. You do not "directly" pay for this type of mortgage insurance. By accepting a small rate increase you are able to eliminate mortgage insurance from being added to your monthly mortgage payment. The lender will actually take care of your mortgage insurance, hence the name, Lender Paid Mortgage Insurance. This is often a good alternative to mortgage insurance and your loan officer should be able to show you a comparison between the short and long term advantages and disadvantages between LPMI and regular PMI (Private Mortgage Insurance).