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Private Mortgage Insurance (PMI) Can Be Avoided  

One of the items you may be faced with when you purchase a new home, or do a mortgage refinance is private mortgage insurance, or PMI.  This insurance also goes by other names; with an FHA loan it is called MI, with the VA it's a funding fee, and with a conventional loan it is the PMI.  Because not every loan requires PMI, you may want to shop around for a loan that doesn't require it.  Your loan officer should go through the steps of the loan with you and advise you of all the fees, points and down payment money that will be required to close on the loan.  This way you can be prepared to meet the obligations when they arise.      

PMI is usually required by lenders when the loan you want when mortgage refinancing or purchasing a home is more than 80% of the appraised value of the house.   This means that it is really an insurance designed to protect the lenders who loan to people who have less than a 20% down payment, or less than 20% home equity in the home they are getting the loan on.  Because this is such large amount of money for people to come up with before purchasing a home, both the Federal government and private insurance companies began to insure the risk that lenders would take if less than the 20% was included as a down payment.  As you can see, this insurance protects the lender, but is paid by the borrower.   

If you are looking at a new home loan or even a mortgage refinance, this 20% rule will apply to you.  Your options with a new home would be to put down a large down payment or to get a second lien on the home.  For a conventional loan, a second lien may make sense because a portion of the money paid each month pays down the principal, while all of the payment on PMI goes to the insurance company.  However, if you are looking at a bad credit mortgage, the second lien is not an option.   

Adding private mortgage insurance to your monthly payments needs to be considered in your budget when determining how much of a loan you can comfortably afford.  The last thing you want to do is get into more debt that you can easily handle.  This is a big burden to carry and can be extremely stressful.  Getting into debt over your head can even lead to foreclosure.   

Remember that if you were required to purchase PMI, if the market value of your home increases so that you have at least 20% equity, you can drop the PMI.  Because you are constantly paying on the principal and your home is more likely to increase in value than to decrease, it is good to know that you won't have to pay PMI forever.