How To Avoid Paying Private Mortgage Insurance

What PMI Is?
PMI is an insurance policy required by most lenders when you are putting less than 20% down on a home purchase. Some loans programs even require more than 20% equity before waving the requirement for mortgage insurance.
This insurance pays out to a lender in case you default on your mortgage loan payments and the lender has to foreclose. The policy does NOT protect you if you lose your job or you don’t have enough cash to make your mortgage payment. However, even though you are not protected by the policy, you are the one paying for it; and unlike mortgage interest expense it is not tax deductible.

The Real Cost of PMI To A Borrower.
On average, mortgage insurance costs about $60 per month per $100,000 of loan amount. A $200,000 mortgage that equals $1,440 per year and you get NO tax deduction for it. More importantly, you also have lost the opportunity to use this money somewhere else. If you structure your mortgage so that you do not have to pay PMI and instead invest just the first 5 years worth of monthly payment savings into your retirement account, over the course of 30 years this money would grow to over $160,000. And this lost opportunity cost of $160,000 plus dollars is the real cost of paying mortgage insurance.

How To Avoid Paying PMI On Your Mortgage.
The following methods for avoiding having to pay mortgage insurance can be used whether you are buying a new property or refinancing an existing property. The two most popular methods are:

1) The 80/10/10 or 80/15/5 approach, which stands for an 80% First mortgage, a 10% 2nd mortgage, and 10% or 5% down payment or equity in the property. This is the best method in our opinion and the one we use most often. Since PMI only applies to first trusts or primary mortgages, we structure a first trust to be no greater than 80% of the value of the property, and we then couple that with a second trust for the remaining moneys that are needed. Thereby achieving the total dollar amount needed to make the loan but also waving the need for PMI by keeping the first trust at 80% Loan To Value.

2) Find a lender that will allow you to finance the PMI into your mortgage interest rate. Some lenders will do this and others will not. The idea is simple though. You agree to accept a slightly increased interest rate typically a ¼% increase in your rate and the lender then pays the PMI for you. The advantage of this method is that the money you would have paid in Private Mortgage Insurance is now a part of your interest payment against your loan and is now tax deductible.
Finally, there are many different ways of saving money on our monthly mortgage obligations as well as our other liabilities. This concept of viewing liabilities as part of our overall financial plan is important not only to help you save money, but critical for you to achieve financial security.