Private Mortgage Insurance and How To Avoid It in Colorado
Private Mortgage Insurance (PMI) is an insurance policy that the borrower pays for, traditionally when putting less than twenty percent down on a purchase or refinance transaction. Please speak with your mortgage consultant for details.
PMI is required on such a loan because the risk of default is significantly higher when the homebuyer or homeowner has less than twenty percent equity in their home.
PMI is an insurance policy that the borrower typically pays for on a monthly basis, as part of the total monthly mortgage payment. PMI can also be paid annually, or split between annual and monthly payments (in some cases like an FHA loan, the costs are split automatically). PMI is not tax deductible, nor does it benefit the borrower in any other way, except that the borrower is able to get a mortgage.
Should the buyer default on the loan, this insurance policy would pay down a certain percentage of the outstanding balance on the mortgage, reducing the investor's risk of losing money during the liquidation process (foreclosure).
The cost for PMI varies greatly by loan program and type of loan. Please speak with your mortgage consultant for details.
Can PMI be avoided if I put less than 20% down?
In some cases yes. With some types of home loans you might put as little as nothing down - to as much as 10% or 15% down - and avoid paying mortgage insurance.
Solutions where mortgage insurance is avoided with less than twenty percent down are called hybrid or combo mortgages. A hybrid mortgage is when you combine an 80% (sometimes less) first mortgage with a 10% - 20% purchase money second mortgage.
There may be an incremental (investor) cost to utilizing this type of solution as this solution offsets an increase in risk for the investor. Please speak with your mortgage consultant for more information.
Some types of home loans offer a "self-insured" option - meaning that a higher interest rate with no mortgage insurance is available. A buyer might choose this option due to the increase in tax deductions resulting from the higher interest rate - whereas the lower rate with mortgage insurance does not have the higher tax deduction (because the mortgage insurance is not tax deductible). This same thought process could motivate a buyer to choose a hybrid mortgage solution.
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