Private mortgage insurance (PMI) is a gimmick that many lenders put into place to presumably protect their loans from lenders who may default on a mortgage or home mortgage refinancing. But in reality, it is just another way a lender is able to make big money on new mortgage rates where the lender doesn’t put a full 20% down.
Instead of Private Mortgage Insurance, Lenders Use Piggyback Loans to Help Finance Mortgages
Oftentimes, buyers either don’t have the full 20% or don’t want to put that much of a down payment on their home mortgage refinance loan. Lenders have developed a system known as piggy back loans for those that don‘t want to pay private mortgage insurance. These loans allow a borrower to take a second mortgage or equity home mortgage line of credit to make up the difference between the amount of money he will contribute as a down payment and the balance owed to make the full 20% down payment.
Private mortgage insurance is actually very expensive, and taking a second loan to make up the difference between a borrower’s down payment and the balance toward that 20% turns out to be less expensive in the long run even when the home mortgage refinance rate or new interest rate on the second mortgage is higher than on the first. The added benefit of using a piggy back loan to avoid paying mortgage insurance is that one can do a double closing at the same time as the first loan saving additional fees.
Utilizing a Second Mortgage as an Equity Line of Credit
Another benefit of having a second mortgage or an equity home mortgage loan is that it is tax deductible in most states. Speak to an accountant before making any decisions. At times the borrower may be able to have a second mortgage set up giving him the benefit of practical use. This may be arranged by taking out a revolving line of credit known as a home equity line which allows the borrower to make withdrawals on the available balance for home improvements or other expenses.
If a borrower can show that he has 20% equity in his house, by law, the lender is required to not charge for private mortgage insurance. In this case, it is as simple as refusing to pay it if it appears in the loan papers. If there is no other option than paying private mortgage insurance due to lack of having the equity in the home or not being able to get a second mortgage, the lender is required to drop the extra mortgage insurance when the home reaches a threshold of 22% equity.
Borrowers looking for low mortgage rates or mortgage refinancing should discuss their available options with more than one lender to see if they qualify for a loan. Individuals who are ready to apply for a mortgage prequalification, even those seeking a mortgage with bad credit, should inquire regarding what a lender can offer to help the borrower avoid paying expensive private mortgage insurance.