First let’s talk a little about what PMI is and why lenders require it. PMI stands for private mortgage insurance. When most homebuyers hear the term insurance they immediately think it is for their benefit. It gets associated with mortgage life insurance that pays off the mortgage in case they die, but PMI does not cover the borrower. PMI protects the lender in case the borrower defaults on the loan.
One thing that makes PMI such a unique form of insurance is that the borrower is required to pay for the lender’s coverage! The lender is covered against losses but the borrower pays… doesn’t seem fair does it? Actually the borrower gets a huge benefit from having the insurance, they get the opportunity to buy a house with an affordable down payment. Many borrowers can not come up with 20% to put down on their desired home, so without PMI they wouldn’t be able to buy a home at all!
Private mortgage insurance is required on convenional mortgages with a loan to value ratio above 80%. The down payment is not what determines it. This is very important becuase let’s pretend you are buying a home and you only have 10% of the purchase price available for a down payment, this doesn’t mean you will be required to pay for PMI! You could still ask to borrow only 80% on your purchase and then you could borrow the other 10% you were short from a different bank. This would mean your loan to value or “LTV” on the first mortgage would only be 80% and PMI would not be required.
The scenario above is one of the most popular ways to avoid paying PMI in Charlotte NC. This is often referred to as an 80/10/10 plan becuase you borrower 80% on the first mortgage, 10% on the 2nd mortgage and you put 10% down. The monthly payment on the 2nd mortgage is typically a variable rate interest only loan, although you can also choose a fixed rate, and therefore is very low and makes the overall monthly payment much lower than a 90% first mortgage with PMI.
Another way to avoid paying monthly for PMI is to ask for a single premium. This option requires a large up front premium (typically between 1.5-2.5%) but eliminates the need to pay a monthly fee. Sometimes you actually have the seller pay for this as a part of your contract negotiations.
If you would like to learn more about PMI and how to avoid it, give me a call at 980-721-7478. I would love to help you save money when buying a home in Charlotte NC!