Primary Mortgage Insurance (PMI) is an extra cost added to a borrower’s mortgage payments if the borrower has less than 80% equity in the home.
PMI offers no benefit whatsoever to a borrower and serves only to protect the lender in the event that payments on the original mortgage loan cease and the lender is forced to foreclose on the property.
If this occurs, the PMI is used to pay the related foreclosure and marketing costs.
How Does PMI Affect Mortgage Payments?
PMI is based on the Loan to Value (LTV) of a home. If the mortgage loan on the property exceeds 80% of the value of the property, PMI will be levied against the borrower until the property reaches a 78% LTV, at which point every mortgage lender is required by the Homeowner‘s Protection Act to remove a borrower’s PMI.
Borrowers that keep track of their PMI can request that PMI be removed from their monthly mortgage payments once the LTV is at 80%.
The Type of Mortgage Loan and the Amount of the Down Payment Affects PMI
Not all mortgage loans require PMI. VA loans administered by the Department of Veteran’s Affairs to members of the U.S. military do not require borrowers to pay PMI on their loans- regardless of the LTV on a home.
Some first time home buyers’ programs also allow borrowers to gain mortgage loan approval with no PMI added to their mortgage payments, but these types of programs are not common.
The down payment a borrower makes ultimately determines whether or not the lender will levy PMI on the mortgage loan. A 20% down payment guarantees that the borrower will pay no PMI because this brings the loan to value of the property down to the 80% required to bypass the charges.
Avoid PMI With a Piggyback Loan
Many borrowers do not have the 20% down payment required to pay no PMI on their mortgage loans. For these individuals, a piggyback loan can be a wise choice.
Piggyback loans are merely loans taken out at the same time as the original mortgage loan to bring a borrower’s down payment up to the required 20%. The piggyback loan is then used as a down payment on the mortgage.
The interest rate on a piggyback loan is typically higher than the interest an individual can expect to pay on a mortgage loan. depending on the amount of money a borrower already has to put toward a down payment, however, the interest charged on a piggyback loan can be significantly less than the monthly PMI payments the borrower would be making otherwise.