Private Mortgage Insurance (pmi)

If your down payment on a home is less than percent of the appraised value or sale price, you must obtain private mortgage insurance, known as PMI, with your lender. This will enable you to obtain a mortgage with a lower down payment because your lender is now protected against any default on the loan. PMI charges vary depending on the size of the down payment and the loan, but they typically amount to about one-half of one percent of the loan, according to the Mortgage Bankers Association of America. Mortgage insurance premiums are not tax deductible. Example Let's say you put down percent or $, on a $, house. The lender multiplies the percent loan, or $,, by . percent. The result is an annual PMI of $, which is divided into monthly payments of $.. Most homebuyers need PMI because percent of the sale price on a home is a lot of money; for instance, that's $, on a $, home. Homebuyers must maintain the PMI premiums until they cross that one-fifth-of-principal threshold, a process that can take years in longer-term mortgages. Tip Keep track of your payments on the principal of the mortgage. When you reach percent equity, notify the lender that it is time to discontinue the PMI premiums. A new law that takes effect in the summer of will require lenders to tell the buyer at closing how many years and months it will take for them to pay percent of the principal to cancel PMI. Note: The law does allow lenders to continue requiring PMI all the way down to percent equity for so-called high-risk borrowers. Traditionally, those loans that are considered riskier include reduced documentation loans, in which customers provide less proof of income and other information during the approval process. Loans for people with spotty credit histories and higher debt-to-income ratios also fall into this category. Additionally, some FHA loans require payment of PMI throughout the entire life of the loan. Ways to avoid PMI In today's market, there are some new ways to avoid mortgage insurance even when you don't have the standard percent down payment. Pay more interest: Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from . percent to percent, depending on the down payment. The advantage is that mortgage interest is tax deductible. Using an "--" loan: This program involves two loans and a percent down payment. The percent loan is financed with a first mortgage equal to percent of the sale price, and a second mortgage for the remaining percent of the sale price. The second mortgage has a higher interest rate but since it applies to only percent of the total loan, the monthly payments on the two mortgages are still lower than paying one mortgage with mortgage insurance. Plus, again, there is the advantage of mortgage interest being tax deductible. Example: If we compare the purchase of a $, home under the "--" plan with a standard fixed mortgage including PMI, we find that the former is $. cheaper each month. Here's how it works. Under the "--" plan, the percent down payment on a $, house is $,. The first mortgage is $, at . percent, which comes to a monthly payment of $. The second mortgage for $, has a . percent interest rate, making a monthly payment of $. Total monthly payments of the two loans: $. With a $, down payment, one mortgage of $, at . percent has a monthly payment of $, plus PMI of $., making a total payment of $..