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PMI Options

With the way home ownership has changed in the past years, it is very likely that you either carry private mortgage insurance (PMI), or that you have multiple home loans in order to avoid PMI. PMI costs about $45/month for every $100,000 of your mortgage. With an average home price of $200,000, across the United States, that means you are probably spending about $90/month on PMI. Considering that you receive no tax advantages for PMI, like what is available for mortgage interest, you may feel like you are just throwing money away. Chances are you have better options available.

What is PMI?

PMI, or private mortgage insurance, is outside insurance that is payable to your mortgage lender if you default on your loan. Before PMI, lenders would not give you a mortgage exceeding 80% of a homes value. With PMI, you are able to purchase a home with less than a 20% down payment. Lenders now require you to carry PMI if you do not have at least 20% equity in your home. Once you have 20% equity in your home, you can cancel your PMI. PMI can be reduced if you have some down payment, as well.

How PMI is paid

There are three ways that you can pay your PMI. The most popular option is a monthly option. When paying monthly, you are required to pay two months up front at closing. Then, you pay your PMI premium along with your mortgage every month. This comes out to about 0.50% annually. Another option is to pay your first year up front, and to pay your PMI annually via your escrow account. There is not much benefit to doing this. The third option is to pay your entire PMI premium, called a single premium, for the life of the loan, up front. In the past, this was about 2.2% of your mortgage. This option nearly became non-existent in the recent years.

You have options

One of the most clever options has become known as the piggy-back loan, or the 80-10-10 option. In this option, you put just 10% down, and your mortgage broker gives you two loans, one for 80%, and a second for 10%. This meets the 80% requirement to avoid PMI. This has become very popular, because you do not pay PMI at all. However, the second loan for 10% is usually at a much higher interest rate in a quick term of 10 to 15 years. Usually, this negates most of the savings made by avoiding PMI. However, all the money is in a mortgage, and the interest is tax deductible.

The latest option is the return of the single premium. In response to the housing market, mortgage insurers have revised the single premium to be 1% of the mortgage value. In addition, this value can be added to the value of your mortgage, so that you do not have to pay it out of pocket at closing. With this option, you do not pay a monthly or annual premium for mortgage insurance, so you can avoid the national average of $90/month. Also, since all of the premium is added to the mortgage, the interest is tax deductible. The only disadvantage is that it increases your mortgage, but only by 1%. What does this mean? Well, the average mortgage costs about $50/month for every $10,000 borrowed. So, if you have a $200,000, your monthly payment would be about $1,000. Adding the 1% premium to the mortgage makes it $202,000, and the monthly payment is $1,010. That is only $10/month more, as compared to the $90/month for PMI. The interest is tax deductible. You have only one mortgage which means you have one payment, and you have one set of paperwork to handle at closing, which typically translates into lower closing costs. Also, you avoid the high interest second loan that may cost you about $20/month more than a single premium option.

Be advised, not all mortgage companies do this. You have to shop around. Even if you have closed on your home in the past two years, you may benefit from refinancing if you have a piggy-back or pay for PMI monthly.

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