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My lender wants me to pay PMI, what is that?
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PMI stands for Private Mortgage Insurance. Basically an insurance that insures the lender against your default. That does not mean that if you default on the loan that you would not have to repay the loan in full if the foreclosure proceeds were not able to pay off the loan. It would just insure that the lender gets repaid fully and you would owe the insurance company any outstanding debt.
Generally PMI kicks in at a loan to value of greater than 80%. If you are borrowing more than 80% of the value of you property in the 1st mortgage you will most likely be asked to pay PMI which does nothing for you and is purely an increase in cost for the loan.
There are ways to get around paying this useless insurance. If you intend to borrow more than 80% of the value of your property structure your loan with a 1st and a 2nd mortgage. Take a first mortgage of 80% and a second mortgage for 10% of the property value. In most cases the first mortgage will be a fixed rate loan with the second mortgage a variable rate home owners line of credit.
Make sure you have your mortgage advisor calculate the blended rate of both loans to give you at least a snapshot to compare it to the costs of a 90% mortgage. In most cases you will be better off with the 80/10 vs. the 90% mortgage. |
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