A PMI Primer: What you Need to Know Before Buying

Mortgages

Most lenders require 20 percent down on a mortgage. And for many, that is just not possible. Consider that on a $100,000 loan, 20 percent is $20,000. If 20 percent down on your first Jacksonville home sounds unattainable, you may want to consider PMI, otherwise known as Private Mortgage Insurance.

What is PMI?

PMI is insurance that you must pay, in addition to your mortgage, if your down payment is less than 20 percent of the appraised value or the sale price of your home. It protects the lender against default on your loan, and must be carried until you have maintained a loan-to-value ratio of at least 80 percent.

Charges for PMI will vary, depending on your down payment and loan type, but in general it equals about one-half to one percent of the loan.

Although PMI is usually the deciding factor upon whether many buyers obtain a mortgage, it is important to remember that the premiums are not tax deductible.

When you go to closing, the lender must specify the terms of your PMI insurance, including how long it will take you to reach the 80 percent loan-to-value amount. When you have attained this magic 80 percent number, it is up to you to immediately inform your lender to drop your PMI insurance.

This may not hold true for some high-risk borrowers or some FHA loans. In fact, some FHA loans require that borrowers maintain their PMI for the life of the loan.

PMI Alternatives

If you have not managed to save up that 20 percent, and PMI doesn’t sound particularly appealing, there may be a couple of options available to you.

The first is to pay more interest on the mortgage for your Jacksonville property, which is typically up to one percent depending on your down payment amount and type of loan. Although in terms of monthly mortgage premiums, carrying PMI or taking a higher interest rate is about the same, it is important to remember that the mortgage interest, unlike PMI, is tax deductible.

You can also choose to take out an 80-10-10 loan (also referred to as piggyback loan). This essentially means that, assuming you’d put down at least 10 percent as a down payment, you take out two mortgages, with the second one being equivalent to about 10 percent of your loan. Although the interest rate on the second mortgage is slightly higher than the first mortgage, the interest is tax deductible.

Remember to explore all your options regarding your mortgage, and stay educated throughout the process.

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