Private Mortgage Insurance - Who needs it?

Lenders associate loan - value rations with risk ratios. The higher loan - values like 90% and 100% financing leave the lenders in a very vulnerable position. In any market pullback the lender could be left with a home that has more owing than it is worth.

As a result, lenders require that any loan over 80% loan - value requires Private Mortgage Insurance (PMI) to cover the mortgage in case of default on a property that is upside down. PMI can be avoided one of?3 ways.

Many lenders offer programs with the PMI built in to the rate they offer and thus can allow for 1 loan to as much as 100% of the purchase. However, rates are substantially higher to accommodate this.

The more common means of avoiding PMI is to get a second mortgage for any amount over 80% financing. This will provide a first mortgage at 80% financing and would avoid the PMI charge. Of course, second mortgages have a higher rate than a first mortgage but this rate will be on a small percentage of the overall amount financed and will have a lower payment that trying 1 loan with PMI built into the rate.

The easiest and most cost saving method is through down payment. A 20% down payment avoids a second mortgage and any PMI requirements.

PMI costs are based on several factors including home value but a good approximation of costs is $2 per $1000 over 80%. (IE: $300,000 value = $240,000 @ 80% / $300,000 all in 1 loan = 60 (amount over 240K) X $2 = $120 per month PMI.

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