If you do not have at least 20 percent equity in your home at the time of getting a new mortgage, the lender might ask you to make some down payment. If you do not or cannot make a down payment to bring the equity in your home to at least the 20 percent level, the lender would want to insure against the loan if you might happen to default on the loan.
The insurance that the lender may request in order to protect himself from any potential defaults on the loan is called the Private Mortgage Insurance or PMI for short.
Normally, if you have do need a PMI, the additional expense per month might be in the range of $100 to $200 depending upon the amount of the mortgage loan.
If the lender notices some issue with your credit history and/or your capability to repay the loan, you might be asked to get the PMI.
Can you avoid the extra payment for the PMI? You might be able to negotiate with the lenders and convince them about your capability to repay the loan on time. You can cite your earlier payment records, your continued job situation and other investments that you might have that you can leverage just in case.
Before, the collapse of the economy in 2008, many lenders agreed to get a second mortgage that would cover another 10 percent of your home value, if you did not have at least 20 percent equity available. With the lender financing the 80 percent, and the second mortgage covering another 10 percent, you were asked to make a down payment of only 10 percent. In some cases, people were able to get a second mortgage for the full remaining 20 percent. Since the condition for not needing a private mortgage insurance or the PMI were fulfilled by taking the second mortgage, the lenders waived the PMI.
Obviously, to be able to take a second mortgage to avoid the PMI is found to be useful by many, but is really speaking a very big risk for the lender of the mortgage. By adding a second mortgage, the borrower in fact increase the chances of default as the total monthly payment increases and the lender is left with no option to protect against the default. Do you still wonder why the economic collapse happened in 2008? It was a result of such malpractices that the lenders willingly connived in order to lend more and more money so that they could get more interest. It was a bad strategy obviously.
