How to Avoid Paying Personal Mortgage Insurance

Personal mortgage insurance, also known as private mortgage insurance or PMI, protects banks and lenders who loan money to homebuyers who put less than 20 percent down on a house. The insurance will kick in if you default on your mortgage, so that the bank doesn't lose money. While PMI may sound like a good deal, it often means you have to pay extra on your house and won't see any benefit. In some cases, it can be hard to cancel, even once you've paid 20 percent of the cost of the mortgage.

Step 1

Put at least 20 percent down on a house. Paying 20 percent or more upfront is the easiest way to avoid personal mortgage insurance. It may mean passing up a house that you really want because you can't afford it right now, though.

Step 2

Obtain an 80/10/10 mortgage. When you take out an 80/10/10, you are actually getting two loans, one for 80 percent of the house and another for 10 percent. You will pay 10 percent of the house's value right away. For instance, for a $300,000 house, you would pay $30,000, and then get a loan for $240,000 and another loan for $30,000. You may end up paying a higher interest rate on the smaller 10 percent loan, but the total cost will still usually be less than the cost of a mortgage plus PMI.

Step 3

Ask for a higher interest rate on your mortgage. Some banks will agree to cut out PMI if you pay an extra 1 percent or so in interest each month. You benefit from paying more interest instead of insurance, since you can deduct your mortgage interest from your taxes. You can refinance after you've paid the 20 percent to get a lower rate.

Step 4

Get lender-paid mortgage insurance, or LPMI, instead of personal mortgage insurance. LPMI blends the cost of the insurance into the interest rate you pay each month so that you can deduct it from your taxes. While you will pay less each month, you can't cancel LPMI, so it's really only worth doing if you have a short-term mortgage or plan on refinancing or selling your house within 10 years.

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