Saturday, April 20, 2013

How to Avoid a Mortgage PMI

How to Avoid a Mortgage PMI






1

Determine whether you can afford a 20 percent down payment. Conventional loans require PMI when the balance of the first mortgage exceeds 80 percent of the home’s value, or LTV. So the simplest way to avoid PMI is to put 20 percent down when purchasing a home. In June 2010, the median home price in the Bay Area was $465,000, meaning the median down payment needed to avoid PMI was $93,000.

2

Find a second mortgage to close with the first mortgage simultaneously if a 20 percent down payment isn't workable. Banks and mortgage brokers both have access to second-mortgage programs. Since conventional lenders require mortgage insurance only when the first mortgage exceeds 80 percent LTV, a second mortgage can allow you to put less than 20 percent down and still enable the first mortgage to close without PMI. Both mortgage lenders will have to approve the other's loan terms, but this is usual and customary.

3

Request a loan from your lender without PMI if neither a large down payment or second mortgage is feasible for you. These no-PMI loan programs are mostly available through banks, but some brokers offer them as well. Typically these are portfolio loans (loans the bank plans to keep instead of selling to Fannie Mae or Freddie Mac) and offer rates that are comparable or a bit higher than conventional rates.

4

Ask the seller to pay a onetime PMI payment as a final option. Some mortgage insurance companies offer single-pay PMI, which requires payment in full upfront and covers the lender for the life of the loan. If your seller will pay this amount and the lender will accept single-pay PMI, then your loan can be above 80 percent LTV.

Tip

  • PMI, while it can be expensive, is for the most part tax-deductible. Typically if the interest on the loan is tax-deductible, so is the PMI. Your accountant will determine whether the PMI qualifies.
  • The higher the percentage your down payment is, the less expensive the PMI will be. If you can put 8 or 9 percent down, try to find enough to equal 10 percent. This will drop the mortgage insurance down to the next lower pricing tier.

Warning

  • Although FHA and VA loans do not require PMI, they do require their own version of it. FHA requires an upfront mortgage insurance premium and a monthly mortgage insurance premium. VA requires a funding fee that varies based on the veteran's status and whether he/she was active duty or Reserve/National Guard.






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