From the Lenders perspective, the loan is based on the lesser of the 2 which is the appraised value or the sales price. So even if the property appraisal comes in higher than the sales price, the Lender will go with the sales price as the value for the loan. Of course you will be putting down a % of the sales price. If you are putting down less then 20% you will have PMI (on a conventional loan).
This will have to remain for at least 12 months at which time you can request the Lender to re-appraise the property. The Lender will have to order the appraisal and you will have to pay the appraisal fee at that time. If the equity is at 20% or higher at that time, you can request the PMI to be removed (no need to refinance). However, because that is the future, equity requirments can change, but this has been the formula for years and year.
All The Best!
FIVE WAYS TO AVOID PMI if you have less than a 20% down payment or less than 20% equity in the home for a refinance.
1.Single Premium. Pay mortgage insurance with single payment at closing: paid as an up front payment or financed into loan. Usually provides significant monthly savings.
PROS: PMI due at closing when financed into loan.Lower monthly payment. Possibility of qualifying for a large loan, since the monthly payment is lower. Premium partially refundable when home is sold or refinanced ahead of term. Only one mortgage loan, so you don't have a high interest rate, more closing costs, and more paper work that comes with a second mortgage loan.
2. Free After Five This option automatically terminates PMI after 5 years, provided you kept a good mortgage payment history. Even if you haven't built up 20% equity in the property, the PMI payments will be eliminated. You will avoid PMI, while still being covered until you have 22% equity in the home.
PROS: You receive coverage after PMI payments end. Only one mortgage loan, so you don't have a high interest rate, more closing costs, and more paper work that comes with a second mortgage loan.
3. Split Edge. Split PMI with lender. Cost shared through paying a refundable, upfront MI payment. This will reduce your PMI payment and your overall mortgage payment. It could also get you qualified for a large loan. If you are buying a home and the seller is give you credits for the closing costs and prepaids, why not use these credits to pay for some of the up front premium and lower your PMI payment. In turn, you will lower your mortgage payment, compliments of the seller!
PROS: Lower monthly PMI payment, in turn lowers your overall payment. Refundability of the unused MI premium if the loan is paid off early. Only one mortgage loan, so you don't have a high interest rate, more closing costs, and more paper work that comes with a second mortgage loan.
4. LPMI - Lender Paid Mortgage Insurance. You can completely eliminate PMi with this program, in exchange for a small adjustment to the interest rate. You will avoid PMI completely and not have to pay the extra monthly payment.
PROS:Avoid PMI all together without having that extra monthly payment. Mortgage interest is tax deductible, where you have to qualify for PMI to be tax deductible. Check with your accountant for more information. Only one mortgage loan, so you don't have a high interest rate, more closing costs, and more paper work that comes with a second mortgage loan.
5. Piggy Back. OLD SCHOOL AND PROBABLY WONâ€™T HAPPEN (the original way to avoid PMI) This option avoids PMI by taking out a second mortgage loan. You finance the first loan up to 80% of the purchase price (or appraised value, depending on if it's a purchase or refinance), then finance the rest with a second mortgage. This USED to be a great way to avoid PMI, but with recent changes with lenders, second mortgages are more difficult to approve, let alone find. Also, they come with a higher interest rate and more closing costs.