Private Mortgage Insurance (PMI)

What is PMI?

PMI, or private mortgage insurance, is a premium that borrowers must pay to the lender if their first mortgage balance is above 80% Loan to Value; PMI insures the lender against borrower's default.  Paying PMI will circumvent the need to save a large down payment on the house, of 20% or more as banks will be more prone to take on riskier borrowers if an insurance against them is in place.  It is estimated that PMI can cost the borrower about .4% to .5% of the loan balance per year. 

PMI is not a deductible expense on your tax returns.

Avoiding PMI

Highly qualified buyers can also avoid paying PMI by creating a first mortgage with 80% of the homes value and then creating a HELOC to finance the remaining balance.

Another technique used to avoid PMI has the lender charging a slightly higher interest rate to cover the expenses of the PMI.  Yes, the mortgage payment is fully deductible; however, you will be locked into this higher interest rate for the life of the loan.  If you plan on staying in the house for a very long time, this option is not advisable. 

For loans originated after July 29, 1999, lenders are mandated to remove PMI charges from your monthly payment when the first mortgage has a LTV of less than 78%.  For loans originated before this date, the borrower will be responsible for calling the lender and requesting the removal of PMI. 

In some cases, the lender will stipulate up front that a risky borrower will be required to pay PMI until their first mortgage balance is 50% LTV.  If you must pay PMI, be very careful to read the loan documentation to understand the rules around PMI as it relates to your loan.
Tim Ord
Ord Oracle

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