What exactly is PMI?
PMI stands for Private Mortgage Insurance. It is a type of insurance policy that�s required by lenders during the time that the outstanding mortgage loan balance is greater than 80% of the home�s appraised value. This insurance policy provides no benefit to the home owner because it is intended only to repay the lender in the event of default.
Do You Need PMI?
Very simply � no. However, you are most definitely required to have it. There are two ways to avoid the additional premium for PMI; the buyer can make a cash deposit on the property that consists of at least 20% of the property�s sale price, or he can �piggyback� two mortgage loans that equal the sale price. This is often referred to as an 80/20 loan, where the primary mortgage provides the bulk of the funds necessary (80%) and the smaller second mortgage provides the remainder.
Since most buyers, especially first time home buyers, do not typically have substantial sums of money available for down payments on real estate, they use the piggyback method to exploit the technical loophole in the lending system, thereby allowing them to purchase a home without also buying the added insurance.