Private Mortgage Insurance (PMI)

Private mortgage insurance is a type of insurance that helps protect the mortgage company against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.

You will usually pay mortgage insurance on a loan that is 80% or more of the value of the home. For this reason, it is common for borrowers to split their loan into two separate loans - one for 80%, and one for the rest of the loan. This prevents the need for mortgage insurance, although you will be paying a higher interest rate on your second mortgage, which will still cost you more.

Don't confuse mortgage insurance with hazard or home owner's insurance. Mortgage insurance does not benefit the consumer in any way. It is simply a policy to help insure the lender against the borrower defaulting on their loan.

Your PMI payment is not tax deductible so it is in your best interest to avoid it and use a program such as the 80/20 loans available. The interest on these combo loans is 100% tax deductible.

Since the PMI payment is not tax deductible, talk to your mortgage broker about splitting your mortgage into two different liens to avoid payment PMI.

When you are required to pay PMI ask your mortgage professional what options are available for payment of the PMI, if any. When you choose to pay the PMI in one lump sump at the beginning of the loan many times you can save some money by choosing this option as opposed to paying it monthly through your mortgage payment. Also, by lowering your term from 30 years to 25 or 20 years this will generally reduce your PMI amounts also. The lower the term of your mortgage generally the less you will pay for PMI.

When the balance on your mortgage falls below 80% of your home's value, you may be able to have the mortgage insurance dropped. Discuss the alternative ways to do this with your mortgage professional

You can also ask your mortgage professional if they have programs that allow the lender to pay the private mortgage insurance premiums for you in exchange for a slight increase to your interest rate.

If you elect to do a lump sum payment of PMI at the beginning of the loan, you can often finance it as part of your mortgage and end up paying less per month than if you paid a monthly premium.

There are several options available for paying PMI. The traditional form of PMI is paid monthly by the borrower. There is also an option to increase the interest rate to cover the payments. This is called Tax Advantage MI. The increased rate has about the same payments but since it is included in the mortgage interest rate a portion of the payment is tax deductible. There is also the option to make a one time initial payment for the PMI, and in some scenarios this payment can be included in the loan amount.