Avoiding Private Mortgage Insurance

Avoiding Private Mortgage Insurance
Some lenders require private mortgage insurance,​ or​ PMI,​ when you​ obtain your mortgage .​
It can cost you​ hundreds,​ even thousands of​ dollars each year .​
It is​ rather easily avoidable,​ however,​ by simply making different financial arrangements .​
Here are a​ few ways that you​ can get out of​ this extra financial burden .​
Private mortgage insurance,​ sometimes also referred to​ as​ Lender's Mortgage Insurance (LMI),​ is​ required by law if​ you​ borrow more than the​ necessary 80% of​ the​ loan to​ value (LTV) of​ the​ house .​
Once you​ go and borrow beyond this 80%,​ PMI becomes necessary .​
PMI can range anywhere from two-tenths up to​ nine-tenths of​ the​ total amount of​ the​ loan .​
Lenders look at​ loans larger than this value as​ being a​ greater risk to​ themselves .​
The private mortgage insurance is​ designed to​ offset their risk .​
However,​ what has actually happened,​ is​ that while it​ makes the​ lender more comfortable,​ it​ can also make it​ that much harder to​ get a​ mortgage because now the​ payments become larger to​ pay for the​ PMI .​
There are three ways around this problem.
* Make a​ Larger Down Payment
When you​ come up with the​ remaining 20% of​ the​ value of​ the​ house,​ you​ then make it​ unnecessary to​ pay the​ PMI .​
Simply by putting down this amount,​ you​ can save hundreds of​ dollars each year .​
Even if​ you​ have to​ borrow the​ money from a​ relative,​ the​ savings will make it​ worthwhile if​ you​ can produce cash at​ closing .​
* Piggyback Loans
This is​ a​ recent feature among lenders to​ help people have a​ way around PMI .​
Instead of​ taking out one mortgage,​ you​ actually take out two .​
The first one is​ for 80% of​ the​ amount you​ need .​
Obviously,​ if​ you​ go more than this,​ you​ pay PMI .​
This becomes your first mortgage .​
A second mortgage is​ taken out at​ the​ same time,​ as​ a​ piggyback on​ top of​ the​ other one,​ typically either for 10%,​ or​ even 15%,​ of​ the​ remaining balance .​
The amount not included in​ this amount is​ expected from you​ as​ a​ down payment .​
These percentages may vary with different lenders,​ but they will be similar .​
* Reduce Amount Owed
Private mortgage insurance was designed to​ be required only when more than 80% is​ borrowed .​
This means that mortgages should contain clauses in​ them that automatically eliminates this added charge when you​ get the​ principal down to​ 80% .​
The lender can,​ however,​ require you​ to​ pay PMI until you​ actually bring it​ down to​ 78%,​ and you​ must be current with your payments .​
(High risk loans may have different terms.) in​ some mortgages,​ however,​ there may be a​ required period of​ time to​ pay the​ PMI - even if​ you​ pass the​ 80% mark .​
Still,​ some lenders may let you​ talk them into removing it​ once you​ do so .​
If you​ already have a​ mortgage and are paying PMI,​ it​ would be worth it​ to​ make larger payments if​ you​ can just to​ be rid of​ it .​
Once you​ reach the​ 80% LTV,​ PMI can usually be removed soon after .​
In 2018,​ if​ you​ took out a​ mortgage this year and are required to​ pay PMI,​ you​ may be able to​ claim some of​ it​ on​ your taxes .​
The main requirement is​ that you​ make less than $110,​000 for the​ tax year .​
It may not be available after this year.

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