Private Mortgage Insurance: The Little-Known Cost

When buying a home there are so many costs and requirements. One of those requirements is providing enough down payment on your prospective home. If you find that you are unable to pay 20 percent or more of your home’s cost as the down payment, you are required to retain private mortgage insurance (PMI).

It is protection for your loan lender in case you default on your loan. Because the down payment is low, it is assumed that you are not as financially stable those able to put down 20 percent or more. If you find that you are required to have PMI, then you should be aware of your payment options. You can pay the insurance premiums in one lump sum or the more popular installment plan.

Even if you find that you cannot put down more than 20 percent of the homes cost, there are a few ways to avoid paying for private mortgage insurance. The first is to increase the amount of insurance you pay. The higher the insurance rate, the more likely the lender is to ignore the need for insurance. This is a viable option for borrowers because this interest is tax-deductible as opposed to the non-deductible insurance costs.

The other way to avoid PMI is to get another loan in addition to the first one. The first loan is 80 percent of the cost, the second covers 10 percent and the remaining percentage is used as the down payment. Even with a higher interest rate on the second loan, it is often less expensive than a loan with a PMI.

Knowing these options can provide you with cost saving benefits and an opportunity to own a home without penalty. Most lenders offer PMI and second mortgage options, talk to your lender if these options fit your situation.