Private mortgage insurance, or PMI, pretty much benefits only the bank in case you default, but you have the privilege of paying for it every month. It's no wonder that most people try to avoid it, but some have no choice because of the lack of a substantial down payment. Others can avoid paying private mortgage insurance and save thousands of dollars over the term of the mortgage.
Pay a down payment of 20 percent or more. You may opt out of private mortgage insurance when the bank is financing 80 percent or less.
Pay more in interest. Some banks may waive private mortgage insurance if you agree to a higher interest rate, even if you lack the 20 percent down payment. Another advantage is that mortgage interest is always tax-deductible, while mortgage insurance may not be under certain financial circumstances.
Keep track of your principal balance. If you've been paying your mortgage and the balance reaches 80 percent of the value, you may request that private mortgage insurance be discontinued. This may involve a home appraisal at your expense. But if you've not had the greatest payment history, it may not be an option at all, depending on details in your mortgage agreement involving "high-risk" debtors.
Use an "80-10-10" or "piggyback" mortgage. Although more complicated, this type of mortgage gets around the 20 percent down payment convention by using two loans -- one with a 10 percent down payment and a mortgage for 80 percent of the home's value, and a second loan for the remaining 10 percent. Piggyback mortgages vary depending on the lender, but all require more paperwork and loan processing, so consult with your accountant to see if this is right for you.
- Some Federal Housing Administration, or FHA, mortgages and those underwritten by other government institutions (Fannie Mae and Freddie Mac) may require payment of private mortgage insurance for the entire term. Check your mortgage documents for details.
- In addition to keeping up with payments, keep a low debt-to-income ratio, and check your credit report regularly. It won't be fun finding out that your lender won't drop private mortgage insurance even when your equity reaches 20 percent or more because you have become a credit risk in the meantime.
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