Avoiding PMI Payments

The easiest method for avoiding PMI payments is to make a cash down payment of 20% or more. This money Avoiding PMI - RiteWaymay come from your savings or from a gift from a relative. You may also be able to borrow against your 401(k) retirement plan to raise the down payment needed. (However this option may have long term effects to your financial future and may not be your best option.)
In lieu of a 20% cash down payment, consider these options:

Private Mortgage Insurance (PMI)

While it increases your payment, PMI may in fact be your best option to obtaining a house. After all, PMI often can be canceled within two or three years and some PMI programs even allow you to collect a refund of some premiums upon canceling. PMI is especially attractive in areas where the property values are steadily increasing.

Lender-paid Mortgage Insurance (MI)

Another method of buying a house with less than 20% down is Lender-paid MI. With this MI program the lender pays for the MI premium while the borrower in turn often receives a slightly higher interest rate, usually a quarter-percent. While this slightly higher-interest rate is for the life of the loan, it often results in a lower monthly payment than taking out two loans (piggy back loans, described below), and reduces the costs of closing two loans. The interest paid on this slightly higher rate loan would be tax deductible. Lender-paid MI cannot be cancelled.

Piggy Back Loan A piggyback loan structure is another way to buy a home without making a 20% down payment and without mortgage insurance (MI). In effect, the borrower is taking out two separate loans – one “piggybacked” onto the other – so you will have two loan payments each month. For example, the first loan could be 80% of the total amount and the second loan for the remaining 20%, and considered to be your down payment amount. The second loan is generally at a higher rate than the first. Many times, the second loan has a variable interest rate, which means it can fluctuate, causing your payment to fluctuate. The most common piggy back loan combinations are:

  • 80-10-10: Eighty percent first loan, 10 percent second (piggy back) loan, 10 percent cash down payment.
  • 80-15-5: Eighty percent first loan, 15 percent second loan, 5 percent cash down payment.
  • 80-20: Eighty percent first loan, 20 percent second loan, no cash down payment.

Like Lender-paid MI you receive a full tax deductible as the interest on the second mortgage is usually tax-deductible. However, you cannot cancel your second loan – you must pay it off in full or the balance due will be deducted from your proceeds when you sell the home.

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