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PMI protects the creditor, in the event that you default on your mortgage. It is of no benefit to you as the borrower, and is generally like money “down the drain.” Borrowers with less than 20% for their down payment have 5 options: Zero down (100% financing), 3%, 5%, 10% or last but not least, 15%.
In recent years the 3% option has become the least popular because it will always require some type of PMI. Whenever possible, Family Mortgage will work to show you alternatives to loans that require PMI. These are called “piggyback mortgages” because they require you to do two loans to avoid paying PMI. The first loan would be 80% of the sales price of the home and the second mortgage would be in the amount of the balance that you need to close. For example, let’s assume you are purchasing a $200,000 house and you have $20,000 to use for a down payment.
In this case we would structure the first mortgage for 80% or $160,000 and the second for 10% or $20,000 leaving you to come up with the difference of $10,000. We call this an 80/10/10 in mortgage lingo. The other options are an 80/15/5 if you have 5% to use for a down payment or an 80/20 if you have no available funds for the down payment.
The rate on the first mortgage will be the same for an 80/10/10 as it would be if you were putting the whole 20% down. If you are doing an 80/15/5 expect to pay a 1/8% higher rate on your first mortgage and for an 80/20 (zero down) expect to pay at least a ¼% higher in rate for the benefit of not being required to come up with any funds for a down payment.
You will only be required to pay PMI if your loan amount exceeds 80% of the appraised value of the home. If this is the case because your house has not appreciated enough to avoid it or your taking cash out that would put you over this threshold, then you can structure the loan as an 80% first mortgage and a second mortgage for the balance that you need to avoid the PMI monthly expense.
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