Home buyers in Flower Mound inquire quite often about the various ways in which they can use conventional lending and avoid PMI (Private Mortgage Insurance). In this post, I am going to talk about the basic facts of Private Mortgage Insurance when using the Conventional Mortgage. Just FYI, there is a difference between FHA MIP and Conventional PMI.
PMI (Private Mortgage Insurance)
If you do not put down 20% or you do not get a 2nd lien so that your first large loan is not at least 80% of the purchase price of the home, then you have to get PMI. On refinances, it’s 80% of the appraised value. The only other way to avoid paying PMI in this case is if you structure the loan with Lender Paid PMI. This is why 20% down payment is the best option when possible.
Avoiding PMI by Using 2ndary Financing
If you only want to put down 5%, 10%, or 15% toward you purchase, you can avoid paying Mortgage Insurance by securing a 2nd lien on the property. For example, if you wanted to put down only 10%, you could look at getting 1st lien that is 80% of the purchase price of your house, and then a 2nd lien that is 10% of the purchase of the house. This is a combo loan that is often called an 80/10/10 (80% 1st lien, 10% 2nd lien, and 10% down payment). The only other way to avoid paying a monthly PMI is to choose the lender paid option. In the lender paid PMI option, the interest rate is just slightly higher (usually by only .25%-.375%), but for those folks with the primary goal being the lowest monthly payment possible, the increase in rate delivers a monthly payment that is lower than the option where the rate is lower but you also have to pay the monthly PMI.