PMI Loans

2007-10-15 12:53:47

( Education )



Difficulties in Getting Loans

With most current home prices at one hundred thousand dollars or more, it may be quite difficult for you to afford a down payment of at least 20%. Your savings may not be enough to shoulder the down payment, or you may need the funds for other purposes such as tuition.

PMI Loans and How They are Computed

Creditors get around this obstacle by letting you pay a lower down payment. However, they also require you to pay private mortgage insurance or PMI to protect themselves in case you default on your loan.

The premium amount of PMI is about a half percent of the home price, net of down payment. This annual PMI is divided into monthly increments, and is added to your monthly amortization payments. This monthly PMI payment can be canceled once you have attained a loan-to-value ratio of 80%. PMI payments are not tax-deductible.

PMI loans are ideal for you if you have no existing credit record, especially if you are a first-time home buyer.

Other Alternatives to PMI Loans

As a borrower, you will prefer no PMI charges, because PMI is only meant to protect the lender, and is actually an unnecessary expense on your part. Paying PMI premiums is not the only way to get a lower down payment requirement.

Many lenders have come up with alternatives that allow you more flexibility and freedom, all with no PMI requirements.

You can opt to pay a higher interest rate on your amortization. While this may seem expensive, you do get a better deal because unlike PMI payments, interest payments are tax-deductible.

You can also finance the down payment portion through a secondary loan at a higher interest rate. For instance, you can borrow under a regular loan with 20% down payment, plus a secondary mortgage to shoulder 10% of the down payment. Effectively, you are satisfying the 20% down payment, because you pay the first 10% from your own funds, and finance the remaining 10%. Overall, you would pay a slightly higher interest charge, but again, these interest payments will give you tax advantages.

If the loan amount is large, as in a jumbo loan, you can actually waive the down payment requirement. Instead, you will be paying more principal each period. It's like amortizing the down payment portion throughout the loan payment period.

Whatever option you choose, with or without PMI, always discuss the matter thoroughly with your lender. Examine the differences in amortization amounts between options, and which options are available to you.


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