PMI Question

[Doofrat]

O.K. I don’t get it with PMI. The idea is that if you put less than 20% down on a house you are at higher risk for default, so you have to pay the PMI. Makes sense to me.

How are people able to bypass this by using another loan to pay the 20% down?

It seems that people are able to do this, am I incorrect?

These people are at the same risk of default, but they don’t have to pay the PMI. Am I missing something here, or is this a loophole?

[gold_dredger_phd]

Who cares? If you can’t put down 20% on a house, how can you afford it?

[Anonymous]

I think your understanding might be a bit off.

I think PMI is necessary when the down is less than 20% because if the lender is forced to forclose on the property, the lender doesn’t have the 20% buffer in equity.

With a piggy back loan, the lender of the 80% still has a 20% buffer and any shortcomings in the sale will fall on the 20% lender and the borrower. That leaves the 80% lender safer.

[bubba99]

PMI insures the primary loan. If that is a loan to value (ltv) of 80% the borrower does not need PMI on that loan. Secondary loans or seconds can be used to pay down the purchase to 80% ltv – so no PMI, but the borrower pays a higher rate for the second mortgage and everything is fine.

The borrower avoids PMI, the primary lender has their 80% ltv, the borrower only pays the higher rate on the second, not the entire loan so everyone is happy. At least until the default. In a default the first lender get their money first. If anything is left over the secondary lender can get paid. For the secondary lender to foreclose, they must pay off the first lender and work with what is left – hence the higher rate.

[PerryChase]

If I remember well, PMI was not necessary until the early 90s downturn. The losses at the time cause new regulations requiring PMI. Bugs, can you confirm?

[Doofrat]

Thanks for the clarification. I figured I must have been missing something.

So the primary lender is covered because the secondary payed the 20% of the primary off. In essence, instead of getting insurance, they are paying a higher rate to a secondary lender who is almost acting like an insurer.

[renterclint]

“Who cares? If you can’t put down 20% on a house, how can you afford it?”

It must be nice having $100k in cold cash sitting in the bank just waiting for your every whim.

I personally believe you can buy a home with more than 80% financing and still manage to continue as a going concern. “Who cares?” I do. It’s a great question and a good answer – thanks for the insight, bubba99.

[kev374]

If you can’t pay 20% down you can also buy PMI upfront and roll it into the mortgage. This is usually cheaper than using a piggyback loan because PMI upfront is at 1.5% flat rate instead of .5% per year 😉 Even if you figure out 5 years to reach 20% equity with 10% down you still come out ahead.

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