Some lenders require private mortgage insurance, or PMI, when you obtain your mortgage. It can cost you hundreds, even thousands of dollars each year. It is rather easily avoidable, however, by simply making different financial arrangements. Here are a few ways that you can get out of this extra financial burden.
Private mortgage insurance, sometimes also referred to as Lender’s Mortgage Insurance (LMI), is required by law if you borrow more than the necessary 80% of the loan to value (LTV) of the house. Once you go and borrow beyond this 80%, PMI becomes necessary. PMI can range anywhere from two-tenths up to nine-tenths of the total amount of the loan.
Lenders look at loans larger than this value as being a greater risk to themselves. The private mortgage insurance is designed to offset their risk. However, what has actually happened, is that while it makes the lender more comfortable, it can also make it that much harder to get a mortgage because now the payments become larger to pay for the PMI. There are three ways around this problem.
* Make A Larger Down Payment
When you come up with the remaining 20% of the value of the house, you then make it unnecessary to pay the PMI. Simply by putting down this amount, you can save hundreds of dollars each year. Even if you have to borrow the money from a relative, the savings will make it worthwhile if you can produce cash at closing.
* Piggyback Loans
This is a recent feature among lenders to help people have a way around PMI. Instead of taking out one mortgage, you actually take out two. The first one is for 80% of the amount you need. Obviously, if you go more than this, you pay PMI. This becomes your first mortgage.
A second mortgage is taken out at the same time, as a piggyback on top of the other one, typically either for 10%, or even 15%, of the remaining balance. The amount not included in this amount is expected from you as a down payment. These percentages may vary with different lenders, but they will be similar.
* Reduce Amount Owed
Private mortgage insurance was designed to be required only when more than 80% is borrowed. This means that mortgages should contain clauses in them that automatically eliminates this added charge when you get the principal down to 80%. The lender can, however, require you to pay PMI until you actually bring it down to 78%, and you must be current with your payments. (High risk loans may have different terms.) In some mortgages, however, there may be a required period of time to pay the PMI – even if you pass the 80% mark. Still, some lenders may let you talk them into removing it once you do so.
If you already have a mortgage and are paying PMI, it would be worth it to make larger payments if you can just to be rid of it. Once you reach the 80% LTV, PMI can usually be removed soon after.
In 2007, if you took out a mortgage this year and are required to pay PMI, you may be able to claim some of it on your taxes. The main requirement is that you make less than $110,000 for the tax year. It may not be available after this year.