Private Mortgage Insurance In The Greater Boston Area – Tips on Avoiding It

Private Mortgage Insurance premiums vary according to the amount of initial down payment and the size of the loan itself, though this usually ranges anywhere from 0.3% to 1.15% of the total loan amount. By avoiding this insurance payment, you can effectively save yourself around $1,000 to $2,000 a year. But you first need to understand what PMI is.

boston mortgage refinanceWhat Is PMI?

Mortgage Insurance is an insurance policy which protects the mortgage lender in the case of a default of payment i.e. if a borrower defaults on the payment of the loan, the lender sells the house, but is unable to get back the remaining amount which is owed through the sale of the house, or the insurance company will cover the remaining amount which is owed.

There are two types of mortgage insurance: private and government. Government insurance is provided by the FHA, while private insurance is provided by many different corporations. Insurance which is provided by such private organizations are known as PMI.

Why is PMI Important To The Lender?

PMI is important for the lender because of the sheer size of the loans involved. Even a single default can result in a large amount of losses for the lender. So PMI is usually a requirement in most cases (especially when the applicants credit scores, bank balance, initial down payments are low).

How To Avoid PMI

PMI can be avoided by using a number of methods such as:

 

  • Large Initial Down Payment: A large initial down payment shows the lender that you are serious about buying the house, allows for a confidence in your ability to pay, and demonstrates your willingness to pay off the entire loan. By placing a large initial down payment of 20% or higher, you can effectively avoid PMI on your mortgage loan.
  • Piggy Back Loan: If you cannot make a initial down payment of 20% another option is to use two mortgage loans. The first mortgage loan will be for 80% of the loan to value of the house. The second loan will be for the remaining 20%, minus the amount you are paying as an initial down payment e.g. if the total cost of the house is $400,000 and you have $40,000 saved up for the initial down payment, then by taking a first mortgage for $320,000 (80% of the LTV Value) and a second mortgage for the remaining $40,000 you can effectively remove PMI from your contract. The negative of this method is the higher interest rate which is associated with the second mortgage loan. The only way to cancel this second loan is to pay it off or to refinance both of them into one once the LTV value reaches 78% or lower.
  • No PMI Loan: Another option is to get a no PMI loan from the outset. A number of lenders are offering this option, and are offering them even when the initial down payment is less than 20%. The flip side is a higher interest rate.

There are a number of options available to you if do not want to pay for PMI. Before deciding on which of the methods to use, make sure to go through both the pros and cons before deciding.

Phil Ganz (354 Posts)

Philip D. Ganz is a Boston Mortgage Broker and Boston Home Loan specialist. For information, expertise, consulting, or advice about home loans, refinancing mortgages, or commercial property loans, contact Phil with no obligation: 617-529-9317


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