How Much on an Equity Loan I Can Borrow Without PMI?
Home loan financing has become quite complicated. With an increase in foreclosures and defaults---most of which can be attributed to the current credit crisis that resulted from the economic downturn---lenders are reducing their financial liability with private mortgage insurance, or PMI. This type of insurance does not protect the borrower; instead, in the event of foreclosure, an insurance company will reimburse a lender for the funds lost.
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PMI and Equity
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PMI is a direct result of a property's loan to value rating. For example, if a house is worth $200,000 and you want to take out a $180,000 mortgage on it, your LTV would be 90 percent. Most lenders require PMI (a charge passed on to the borrower on top of the standard mortgage payment) if an LTV is greater than 80 percent. Therefore, new homeowners who make a down payment of less than 20 percent are charged PMI.
The Introduction of the 80/20
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Some lenders have reduced the need for PMI by offering new homeowners an 80/20 loan. This means that two loans are funded simultaneously at closing: a first mortgage consisting of 80 percent of the property value and a second mortgage (equity loan) consisting of the remaining 20 percent. Such loans allow borrowers to become homeowners with little or no money down. (They have also caused serious problems in the real estate market.)
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Avoiding PMI
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The easiest way to avoid PMI is to keep your LTV under 80 percent. If you have a $100,000 first mortgage and your home is worth $200,000, the maximum equity loan you can take without incurring PMI charges is $60,000. It's important to remember that equity lines are often revolving lines of credit. If your credit line---or the amount you could potentially borrow---puts your LTV over 80 percent, your lender will require you to pay PMI.
Costs and Benefits
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Before accepting an 80/20 or equity loan, it's important to consider both options. Sometimes PMI on a single loan will be less expensive than accepting two mortgages. Have your loan representative show you amortization schedules for both options so that you can calculate the interest you'll be paying in the long term.
Warning
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PMI is not the same as payment protection, or mortgage insurance. Many lenders offer life, disability and involuntary unemployment insurance on their secured loans. These products are never required---unlike PMI---and any attempt to force you to accept these products should be reported to your state attorney general. There are advantages to mortgage insurance, but these products are optional.
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