Private Mortgage Insurance - Can You Avoid It?

Private Mortgage Insurance (PMI) is a monthly insurance fee paid in addition to a mortgage payment. This insurance premium protects the bank in case you default on your loan.

PMI is usually mandatory if your down payment is less than 20% of the purchase price (i.e., your loan is more than 80% of the home's value). Homeowners who put down less than 20% of the home's value will have to pay PMI until they have over 20% equity in their home.

Avoiding PMI
Because PMI can make it difficult for homeowners to afford their mortgage payments, lenders have created unique options to avoid PMI in the first place. Referred to as 80-10-10 loans, or 80-15-5 loans, these loan packages include a primary loan not to exceed 80% of the value of the home, plus one or more home equity loans to cover the rest of the purchase price (less any down payment the buyer is making).

Though the interest rates on the home equity loans will be higher than the interest rate on the primary mortgage, the elimination of PMI will still lower the monthly payments owed. And as you build equity in your home, you can review the possibility of refinancing into one mortgage.

Creative Financing
Though not every home buyer will be able to avoid PMI, many will do so by using creative loan financing. The loan packages mentioned above are all perfectly legal and ethical -- they are a unique use of the system to help people get into homes without worrying about extra fees like private mortgage insurance.

Keep in mind that once you begin paying PMI, you will continue to pay it until you have 23% or more in equity (not the 20% that is the initial trigger). This is an important factor to consider when deciding between a multiple-loan package or a single loan.

Your financial advisor or accountant can help you crunch the numbers to determine which path makes more economic sense for you -- paying PMI, or avoiding it.

Make sure your lender speaks to you about PMI, and ask if they have factored PMI into their good faith estimate. That way, you'll have no unpleasant surprises on closing day. Most lenders should proactively discuss PMI with you, but if they don't you should raise the issue yourself.

* Copyright 2006, Brandon Cornett. You may republish this article if you keep the byline and author's note, and also leave the hyperlinks active.