How to Avoid Private Mortgage Insurance (PMI)
by Jim Cramer
Many home buyers find it difficult to provide the required 20%
down payment and are forced to pay private mortgage insurance, or
PMI, in order to buy a home. Private mortgage insurance solves
the down payment problem but creates another two: it increases
monthly payments and on top of that it is not tax deductible.
Fortunately, there is more than one way to get your desired home
without having the 20% down payment and avoid PMI at the same
Terminating PMI When You Already Have One
The use of private mortgage insurance has been a great way to
make it possible for a borrower to buy a home with as little as
3-5 % down payment and give the lender insurance in case the
borrower defaults on the home loan. However since PMI payments
can be significant, the borrower starts to ask himself/herself
how to get rid of those payments.
The Homeowner's Protection Act includes rules for automatic
suspension of PMI payments and cancellation of PMI when 22%
equity in the borrower-s home is reached. Those rules apply to
mortgages signed on or after July 29, 1999, and exclude
government-insured FHA or VA mortgages that are considered
high-risk to default.
Additionally, disregarding the time when the mortgage was signed,
the borrower may ask for PMI termination once s/he exceeds 20%
Avoiding Private Mortgage Insurance via a Piggyback Loan
Piggyback loans are a very popular way of avoiding private
mortgage insurance. It consists of taking a loan (first mortgage)
covering 80% of the sale price of the home and taking and placing
additional 5%, 10% or 15% on a second mortgage. A combination of
80% first mortgage, 5% second mortgage and 15% down payment is
referred to as 80/5/15. Accordingly, the other two loan
combinations are 80/10/10 and 80/15/5.
Although second mortgages generally have higher rates, in the end
the borrower may save money because in contrast to PMI payments,
now the loan payments are tax deductible.
Choosing a Finance Single Premium Option over Private Mortgage
Since an increasing number of borrowers are turning to piggyback
loans in order to avoid PMI, the mortgage insurance industry came
up with this solution claiming that it lowers monthly mortgage
payments to the same or lower level as a piggyback loan. With
this option homebuyers pay a single premium on their insurance
and it is amortized over the term of loan.
One of the pitfalls of this solution is that few lenders offer
this option, since Fannie Mae and Freddie Mac do not work with
this kind of PMI structure.
Finding a Loan with No Private Mortgage Insurance
Loans with no PMI have one great disadvantage - they typically
have higher interest rates. Instead of paying regular PMI, the
latter is included in the higher rate of the mortgage.
Which of the above solutions will be best for you depends
entirely on your particular case. Sometimes paying the private
mortgage insurance might turn out more beneficial than choosing
to avoid it with a second mortgage. Therefore you should consider
your decision carefully and make all the necessary calculations
in order to make the right choice.
Jim Cramer is a mortgage expert who shares his knowledge and
years of experience by answering hundreds of questions about
mortgage loans at http://www.mortgageqna.com
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