Private Mortgage Insurance (PMI)

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How can you avoid paying PMI?

There are ways of both avoiding Private Mortgage Insurance and achieving a smaller than 20 percent down payment. Many lenders offer a loan called an “80/10/10.” Instead of one loan, you get two. You’ll have a first mortgage of 80 percent of the home’s value, a second mortgage of 10 percent of the home’s value, and you’ll make a 10 percent down payment. Some lenders may even offer an 80/15/5. This may seem complicated, since you’re still borrowing the same amount of money, but the lender in the “first position” is only lending 80 percent of the entire loan amount, which is less of a risk than the full loan amount. You get the small down payment and the tax-deductible interest. In addition, the total monthly payments are often smaller than one larger loan with PMI.

The other way out is to get a loan that builds the PMI into the interest rate. In this case, you agree to pay a higher interest rate in exchange for the lender loaning you more money than they normally would. It can be a nice compromise, because the interest is still tax deductible and it’s simpler than doing two loan transactions.

The key here is comparison. Ask your loan agent for some mortagae insurance advice. Have them run some numbers for you on an 80/10/10 and a loan with built-in PMI. Then see which one will cost less or be most beneficial based on your financial situation.

Note that these principles apply only to conventional loans. FHA loans have a Mortgage Insurance Premium (MIP), which is required for the life of the loan.

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