Lenders are normally protected from the risk of default and foreclosure by an insurance mortgage policy known as the (PMI) Private Mortgage Insurance. This program is made for buyers with the funds to make a significant down payment or some buyers who won’t consider making a down payment and get affordable rates for their mortgage finance terms. PMI is normally acquired when a buyer makes a home purchase with a down payment below 20%, the lender will probably require you to get insurance from a PMI after approving the loan to minimize risk.
The PMI normally relies on your mortgage percentage that must be paid on monthly basis. It amount will usually vary according to your loan amount and your credit risk. Since the period of the housing crisis, several banks are becoming more reluctant in lending to homeowners who might be at risk of default or foreclosure, but for those who would meet the requirements to feet in the category, you will be asked to have a PMI. The PMI created to protect the interest of banks and lenders. It helps lenders recover just in case the borrower defaults on their loan and fall into foreclosure.
The PMI does not protect the borrower in any way. This is not a homeowners insurance and was not made to protect your property if destroyed. It only helps the lender get their money back in case you default on payment.
Below are a few options to avoid paying PMI:
- Make a 20 % down payment: The first and most accurate way to avoid the Private Mortgage Insurance is by making a down payment of at least 20% of your home’s purchase price.
- Lender-Paid Mortgage Insurance (LMPI): In this option, the PMI cost is added to the mortgage interest rate for the term if the loan. This gives you the ability to sometimes end up paying more in interest over the loan time frame.
The Sherry Riano Team, the BEST mortgage lenders in Cary, would love to walk you through the buying process! Please reach out with any questions on private mortgage insurance or any VA Loan questions you may have!