When you put less than 20% as your down payment most banks require that you pay for Private Mortgage Insurance (PMI). This insurance protects the lender (not the borrower) in case the borrower doesn’t make their mortgage payments, but it only covers the difference of up to 20% of the loan. Therefore, if the borrower puts 5% down the insurance covers 15%. Keep in mind if the borrower defaults (stops paying), the bank can still repossess their home, and the insurance will pay the bank their 15% difference of the typical 20% down.
About 10 years ago a law passed that requires insurance companies to cancel PMI once the borrower owns 22% of their home. Borrower’s who are on top of things will cancel their PMI on their own once they own 20% of the home (which is usually the banks limit for PMI). Also, equity counts in this situation. If you put 15% down and are paying PMI but your home has game up in value you can cancel your PMI if you can convince the bank (appraisal) that you now own 20% of your home.
Just like other insurance programs, costs vary from company to company. A loose rule of thumb is to times your loan amount by .70%(the loose part) and divide by 12 to get your monthly amount. So (100,000 X .007)/12 = $58.33 month.
Not to long ago a common way to avoid paying PMI was to get a “piggyback” loan (or second mortgage) to cover the rest of the amount you didn’t put down. But with the current market conditions (fall of the subprime market), piggy back loans are pretty much history. One advantage piggyback loans used to have over PMI was a tax write off, but in 2006 congressed tax bill granting deductions to homeowners who pay PMI.
If you have any questions or comments, feel free to reach me at RBaker@PeregrineLending.com or 805-540-0866.
