Some lenders will not give you a mortgage unless you have private mortgage insurance, or PMI. Each year, it could cost you hundreds or even thousands of dollars. But you can avoid it pretty easily by just making different financial plans. Here are a few ways to get out of having to pay this extra money.
Private mortgage insurance, sometimes called Lender's Mortgage Insurance (LMI), is required by law if you borrow more than the required 80 percent of the house's loan to value (LTV). When you borrow more than 80 percent of your income, PMI is required. PMI can cost between two-tenths and nine-tenths of the total loan amount.
Lenders think that loans worth more than this amount are a bigger risk for them. The private mortgage insurance is meant to make up for the risk they are taking. But what has happened is that, even though it makes the lender feel better, it can make it harder to get a mortgage because the payments are now higher to cover the PMI. This problem can be solved in three ways.
- Put down more money at first.
When you come up with the remaining 20% of the house's value, you won't need to pay the PMI anymore. You can save hundreds of dollars each year just by putting this amount aside. Even if you have to borrow the money from a family member, the money you save will make it worth it.
- Piggyback Loans
This is a new way that lenders are giving people to get around PMI. You actually get two mortgages instead of just one. The first one will give you 80% of what you need. If you go further than this, you have to pay PMI. This is your first home loan.
A second mortgage is taken out at the same time, on top of the first one. This second mortgage is usually for 10 or 15 percent of the remaining balance. As a down payment, you will need to pay the amount that is not included in this amount. These percentages may be different from one lender to the next, but they will be about the same.
- Lower the amount you owe
Private mortgage insurance was made so that it would only be needed when more than 80% of the loan is borrowed. This means that mortgages should have a clause that automatically gets rid of this extra fee when the principal is paid down to 80%. But the lender can make you pay PMI until you get it down to 78 percent, and you must be on time with your payments. (The terms of high-risk loans may be different.) Even if you have paid off 80% of your mortgage, you may still have to pay PMI for a certain amount of time. Still, some lenders may be willing to remove it if you talk to them about it.
If you already have a mortgage and are paying PMI, it would be worth it to make bigger payments if you can just to get rid of it. Once you reach 80% LTV, PMI can usually be taken off right away.
If you got a mortgage in 2007 and had to pay PMI, you might be able to get some of that money back on your taxes. The main requirement is that your income for the tax year is less than $110,000. After this year, it might not be available anymore.
