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Avoiding Private Mortgage Insurance (PMI)

By: Ron Vignari, Sun Nov 27th, 2005

Avoiding PMI The easiest way to avoid PMI is to make a cash down payment of 20% or more. Potential sources of additional cash include:

Borrowing against your 401(k) retirement plan Taking a margin loan against your stock Asking relatives for a gift Refinancing your car and taking cash out Selling your car, jewelry, etc. In the event you are unable to make a 20% cash down payment, consider these options:

Piggy Back Loan: A piggy back loan usually allows you to avoid PMI even though you are making a down payment of less than 20 percent. The most common piggy back loan combinations are:

80-10-10: Eighty percent first loan, 10 percent second (piggy back) loan, 10 percent cash down payment. 80-15-5: Eighty percent first loan, 15 percent second loan, 5 percent cash down payment. 80-20: Eighty percent first loan, 20 percent second loan, no cash down payment.

Even though the second loan rate may be higher than the first loan rate, you usually come out ahead since you don't have to pay PMI. Also, the interest on the second mortgage will likely be fully tax-deductible.

Lender Paid PMI (LPMI): In this case, the lender makes your PMI payment for you, but charges you a higher rate on the loan. Since the PMI payment is not tax deductible, and the higher rate results in a higher, tax-deductible interest payment, in the short-run you may save money by choosing LPMI over the conventional PMI option. The disadvantage is you're stuck with the higher interest rate for the life of the loan. If you had paid PMI, you could cancel it when you achieved 20% equity in your property.

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