Florida Mortgage- What in the World is PMI? Learning the Language of Mortgages.

You met with a mortgage lender today and he brought up the term PMI. You have no clue what the term means, but you are sure that you need to know more about it before meeting with your lender again.

So what is PMI? PMI is an acronym for personal mortgage insurance and it’s vital to understand it and how it can affect you and your mortgage.

Personal mortgage insurance is a benefit for the lender in case the mortgage holder (you) would default on the mortgage terms. This insurance pays the lender in the event that this occurs and virtually makes the mortgage risk-free for the lender.

Why would you pay PMI? Most lenders require homebuyers with a down payment that is less than 20% of the home’s value. (This is why many lenders recommend that people have a 20% down payment available before getting a mortgage.)

PMI can be very expensive for the homeowner and is usually paid as an addition to the monthly mortgage payment. Some lenders require homeowners to pay the amount in a lump-sum for one year before making monthly payments.

You can terminate paying the PMI once he has paid 20% of the value of the home. You must watch this carefully, as lenders will not notify you when you’ve reached the magic 20% point. The lenders will require you to have a home appraisal done in order to release your liability from the PMI.

You do have some options to keep from paying this insurance. One such option is a "Piggy-Back Loan." This type of loan combines a first mortgage with the second "piggy-back" loan to keep your payment lower than what you would pay with a traditional mortgage plus personal mortgage insurance.

Piggy-back loans have advantages and disadvantages. The advantages can outweigh the disadvantages, depending on your outlook. For instance, a piggy-back loan can be tax-deductible (PMI is not.) Other advantages include possibly lower interest rate and greater flexibility/

Disadvantages include the length of time you will pay a piggy-back loan may exceed that of PMI and that you will be paying closing costs twice (one for both loans.) This may drive up your total expenditure.

However you choose, you will be paying extra without a 20% down payment on your home. The easiest choice is to save long enough for that 20% down payment before purchasing your next home.

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