Getting loans for buying homes has become relatively easy, but whichever property you buy, youll need to make a down payment of 20% of its sale price. If you dont have this amount, you can obtain private mortgage insurance, which is commonly known as PMI. This is a win-win situation for both you and the lender because you will get the loan amount and the lender will get the security for the payment of the loan.
It is important to understand the concept of private mortgage. Low interest rates have pushed up the prices of property and therefore also the amount required for down payment. Private mortgage insurance bails out the homebuyers, but it is important to point out that PMI does not protect the homebuyer. Rather, it covers the mortgage company if the borrower is not able to pay the due amount.
PMI buyers will require you to make an initial down payment, and then premiums for the rest of the amount on a monthly basis. This premium depends upon the down payment you make; the smaller the down payment, the higher will be the PMI premium. Also, you must note that you can cancel your PMI when your loan-to-value ratio hits 80%. At this stage, you will need to contact your lender to cancel your PMI premiums. This means that you need to keep track on the principals of the mortgage. It is normal for people to do away with the PMI as soon as possible because PMIs are not tax deductible.
Giver the nature of PMIs, it is best to avoid taking them. One of avoiding PMI is paying a higher rate of interest on your loan. If you agree to this, chances are that lenders will waive off the mortgage insurance requirement.
The second way involves two loans. This means that you give a down payment of 10% and get 90% for finance. The 90% of the loan will be financed in two parts. 80% loan will be treated as the first mortgage. A second mortgage will be applied to the remaining 10%. Compare this to the PMIs and you will find that taking a second mortgage works out to be comparatively cheaper.
All said, you can buy PMI to bail yourself out of a difficult situation, if you fall short of the down payment amount required to buy property, but you must consider other options before signing the dotted line.
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