How to Avoid Private Mortgage Insurance

by : Peter Kenny

Copyright (c) 2008 Peter Kenny

Private mortgage insurance solves the down payment problem but creates two new problems. Your monthly payments will be larger 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 time.

Private mortgage insurance enables a borrower to put down a down payment of only 3-5%. This is also good to give the lender insurance if the borrower defaults on the loan. PMI payments can be large amounts so soon the borrower begins to want to rid himself of those payments. Rules for the suspension of PMI are activated when 22% equity is reached by the borrower. Those rules exclude government-insured FHA or VA mortgages which may be at high risk to default.

Piggyback loans are a way of taking 80% of the sale price of a home on a loan or a first mortgage and then taking a second mortgage of 5%, 10%, or 15%. This is a very popular way of avoiding private mortgage insurance. Even though a second mortgage usually has a higher rate the borrower could save money in the long run due to the fact loan payments are tax deductible unlike PMI payments. 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.

With many borrowers going to piggyback loans to avoid PMI, a solution by the mortgage industry was introduced that it claimed lowered monthly mortgage payments to the same or lower level as a piggyback loan. The insurance is amortized over the term of the loan which simply means a single payment for the homebuyer. One of the pitfalls of this solution is that few lenders offer this option or work with the PMI structure.

Which loan you choose is entirely dependent on your individual case. You use all the tools at your disposal to make an informed decision. Paying the private mortgage insurance could possibly be a better solution than choosing to avoid it with a second mortgage. The disadvantage to loans with no PMI is that they can have higher interest rates. After making all the necessary calculations, you should carefully consider your options and try to make the best choice for yourself.