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PMI - Principal Mortgage Insurance

The term PMI is widely used as an abbreviation for "Principal Mortgage Insurance". If you break it down it's exactly what it sounds like. It's insurance on your mortgage until you've paid down a total of 20% of what it's worth. It's usually only about $55.00 for every $100,000 that you borrow and the bank will stop charging you once you hit the 20% mark. Be careful because PMI doesn't usually show up on a mortgage calculator or an amortization schedule. It's barely even mentioned at the bank when you're getting the loan so ask about it and how to avoid it.

If you put down 20% from the start then you never have to worry about PMI. You can also get a second loan which is similar to putting a down payment of 20% and then getting a home equity loan for another 15%. They call it a second mortgage loan. You get your primary mortgage for 80% of the home value and then a second loan for 15% which means you need to come up with a 5% down payment and you can avoid PMI. If you only have a 5% down payment then I recommend this formula of getting a mortgage. If you want to ask for it when you go to the bank just ask for an 80/15/5 and they'll know what you mean. You can also do an 80/10/10 which is a 10% down payment and a secondary loan of 10% of the mortgage.

Play around with a mortgage calculator to figure out the best payment options for yourself. You might find that paying the principal mortgage insurance is the right option for you. The interest rates are a bit different on the secondary loans and you're also supposed to get them amortized over 15-20 years instead of 30.

Your principal mortgage insurance can also go away by appreciation of the home. If you buy a $100,000 home and put down 5% ($5,000) then you'll be paying PMI for awhile before you have the full 20% down. However if the housing market is going up and in a year or two your home is worth $120,000 then talk to your bank about getting an appraisal to remove the PMI from your mortgage. If the appraisal comes back at $120,000 then the bank has it's 20% buffer that it needs to no longer charge you PMI. The only reason the bank does it is so that they can get their money back easier if you stop paying the loan.

I would try to stay away from PMI at all costs if you can. It's much easier to just get the two mortgages and then you're even paying down some of the loan in 20 years instead of all of it at 30 years plus PMI. There really isn't a point of it anymore because of the other loans that they offer. 




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