African descent couple shows off key after purchasing a new home. 'Sold', 'For Sale' sign in background. Front entrance of this beautiful brick and stone home.

PMI are three letters that some potential homebuyers will hear from a perspective lender.  PMI stands for private mortgage insurance, and most homebuyers would prefer not to pay it, especially since PMI is expensive and may not be tax deductible.

However, if your down payment on a house will be less the 20%, you will have to pay for private mortgage insurance, as required by the lender.  This insurance is created to protect the lender from taking a loss, if by chance the homebuyer ends up in foreclosure.  PMI is also required if a homeowner decides to refinance his or her mortgage with less than 20% equity in the house.

In essence, private mortgage insurance is a real insurance policy issued by an insurance company that is set up to help your lender. It helps the lender if the lender is not able to recoup the outstanding balance by selling the home in case of foreclosure; therefore the insurance company that issued your PMI will pay the lender the difference.

Most of the time, if your LTV (loan to value) ratio is less than 80%, you will not pay PMI. However, poor credit and other “high-risk” factors could be red flags to a lender, which would then ask for PMI, even if you have a 70%, 60% or even 50% LTV.

So, how does one get around paying PMI?

First Independence offers the option of applying for 80/10/10 financing.  This simply means that 80% of the loan is financed as a first mortgage, 10% is part of a second mortgage, and the last 10% is a cash down payment.   With 80/10/10 financing, you put a smaller amount of money as a down payment, and avoid private mortgage insurance costs.  Even if you have the 20% as a down payment, putting 10% down can free up cash to pay off other debt, or purchase needed items for the new house.

Additionally, 80/10/10 financing can be used as a jumbo loan replacement.  A jumbo loan is defined as a loan that’s more than the conforming limit set by Fannie Mae and Freddie Mac.  In Wayne County and other counties in Michigan, any mortgage for a single home of more than $417,000 is considered a jumbo loan.  In areas with high-priced homes, conforming limits are much higher.

First Independence Bank (FIB) also offers a first mortgage, plus Home Equity Loan Combo to avoid the need for private mortgage insurance.  Features include combining the FIB Home Equity Line of Credit, or the FIB Home Equity Fixed Rate Loan with your conventional mortgage financing to avoid the need for PMI.  Another way is if your loan is just over the jumbo loan mark, you can use FIB’s combo loan to avoid higher rates and tougher qualifications that jumbo loans bring.

First independence has the products and services that borrowers need to make financing their next home simple and straight forward.

For all your mortgage needs, including learning more about PMI alternatives, call First Independence’s mortgage loan officer, Tom Williams NMLS #710447 at  586-416-5750, ext. 1208.

Established in 1970 as a community development financial institution, First Independence continues to make dreams become realities for its community, citizens and businesses.  .  First Independence Bank is an equal opportunity lender and member of the Federal Deposit Insurance Corporation.

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