Mortgage insurance, also known as private mortgage insurance or PMI is paid every month as part of your mortgage payment until you have more than 20% equity in your home. This insurance is to protect the lender in case you default on your loan.
Mortgage insurance is only needed if any one loan you have is for more than 80% of the value of your home. The calculations that are important are: the value of your home based on your appraisal and the loan amount itself.
In order to avoid mortgage insurance (PMI) many borrowers who are not able to put 20% or more down on their home take out more than one loan rather than one loan. Some people refer to these loans as 80-10-10 loans because a popular calculation was 80% primary mortgage, 10% home equity loan and 10% down. This loan structure avoided mortgage insurance or PMI because the loan was 20% or more away from the value of the house.
It is important to ask your lender about mortgage insurance early on so they can work out a work-around if the mortgage insurance premium will put you in a tighter economic position - for many consumers the extra fee is a difficult burden and therefore they opt for loan packages which will enable them to avoid paying mortgage insurance.
Though for some homebuyers, there is no way to avoid mortgage insurance, for many others creative financing with the right loan officer can help them avoid PMI and therefore have a lower mortgage payment without the extra premium for the mortgage insurance.
