What is PMI?
Simply stated, Private Mortgage Insurance (PMI) is a guaranty that protects the lender against loss in the event that a borrower defaults. But what it means to homebuyers is that they can afford more house than they would otherwise.
How does this work? Without PMI, lenders typically require a 20 percent down payment. if buyers purchase PMI they can realize their homeownership with only 5% down payment. PMI increases a purchaser’s buying power.
Is there an alternative to paying PMI?
Yes, in recent years lenders have become more creative with financing. In order to eliminate the need to purchase PMI, it is now very common for borrowers to get a 1st and 2nd loan on a property. Here’s how it works:
You have 5% to put down. You create a 15% 2nd mortgage, giving you a total of 20% to put down on a 80% mortgage. Typically the 2nd mortgage is at a higher interest rate than the first. Given this, the purchaser is more likely to pay the second off quicker in the meantime increasing equity in the home.
The benefit of creating this type of loan is that the interest can be deducted. PMI cannot be deducted. The end result gives the purchaser more buying power than using PMI.
The only negative to this strategy is sometimes the lender ends up charging expenses on both loans, so you pay double closing fees. Once again, a good lender will know how to originate two loans simultaneously without charging a small fortune!
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