How and why to avoid PMI?

Private Mortgage Insurance or "PMI" is placed on loans with a Loan to Value of greater than 80%. This is insurance that the bank is taking out in case you fail to make your payments and they must foreclose. While a tax write-off in 2007, historically, it has not been. To date, the legislation making it a tax write-off has not been renewed. Thus, a combo loan is a better idea as the mortgage interest may be written off on your income tax.

You can also avoid PMI with a mortgage program that has the lender pay your PMI. These lender paid PMI programs or LMPI are becoming increasingly popular with borrowers. The trade of for the lender paid PMI is a higher interest rate.

There are a few ways to avoid PMI. One such way is to obtain a loan from a lender that does not charge PMI, regardless of your Loan to Value. Most sub-prime lenders are like this and they do not charge PMI. The reason that most of them do not have to charge PMI is because their rates are already adjusted based on a risk assessment level and their interest rates are generally higher than what conforming rates are. Sometimes obtaining a combo loan may be in your best interest, other times a sub-prime loan may be best for you, and other times it may just make more sense to take the lower rate and pay for the PMI. Your mortgage professional should be able to discuss your options with you and let you know what option seems best for you.

Some programs like MyCommunity Mortgage offer reduced PMI which can actaully give you a lower payment than a split loan such as an 80/20. Once the principal balance of your mortgage is 80% or less than the value of your home, you can provide your PMI company with an appraisal showing so and they will remove your PMI without having to refinance.

PMI may be fully tax deductible if your household income is less than 100k per year. Consult your mortgage professional for details.

Depending on your credit score, avoiding PMI could save you hundreds or even thousands of dollars per month.

» DISCLAIMER: The information contained in this article on 'How and why to avoid PMI?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.