PMI or private mortgage insurance is insurance that you must purchase if you do not have a twenty percent down payment. The insurance is to protect the bank if you were to default on the loan. It is not insurance to protect you. PMI is usually based on a percentage of your mortgage that you must pay every month. It will vary according to the amount of your loan and your credit risk.
It is important to realize that you can cancel PMI once you have paid your loan down so that you only owe eighty percent on your home. However, this may take longer than you realize, because a large percentage of your beginning payments goes to the interest, and very little actually goes to your principle. Other lenders will allow you to cancel PMI after two years of on time payments.
You can avoid PMI insurance by taking out a second loan for the additional amount you need to borrow. This is a form of creative financing. Your loan amounts will be 80/20 or 80/15/5, with the five being a down payment that you saved up yourself. If you decide to do this, it is important to realize that you need to add the costs of both loans together when you are considering how much you can borrow. You may be better off saving a down payment for your home.
Additionally if you are a credit risk, you may still be paying for your risk with higher interest rates. PMI may be looked at as a negative thing, but it depends on the loans you are looking at. If you have PMI on a lower interest loan, you may end up saving money in the long run, rather than paying a higher interest rate the entire life of the loan. It is important to look at the entire picture when choosing your loan.
