How to Avoid Paying Upfront Mortgage Insurance
Private mortgage insurance (PMI) is a fee charged to borrowers by lenders to protect the lender in the event of the borrower's foreclosure. The insurance provides no benefit to the borrower and is not tax deductible. It is in the borrower's best interest to avoid PMI. This can be done by selecting the correct mortgage and down payment option. Also, consult your mortgage lender for more specific information to your mortgage.
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Instructions
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Choose a conventional mortgage to avoid PMI. Government mortgage options, such as VA, FHA, and USDA loans, all require PMI in the form of an upfront fee or a monthly payment, regardless of down payment. This fee is known as a funding fee and acts in the same manner as PMI.
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Make a down payment of at least 20 percent to avoid the PMI charge altogether. Some lenders will allow borrowers to get second mortgages in the amount of a 10 percent to 20 percent down payment to avoid PMI.
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Ask your lender about specific options, including raising your monthly interest rate to cover the expense of PMI. While this increases your monthly payment and interest expense, it makes the cost of the PMI tax deductible.
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Tips & Warnings
If a 20 percent down payment is too much for you to handle, consider asking relatives for a monetary gift toward your down payment. This can reduce or eliminate the need for PMI. You can negotiate the gift as a loan, if so desired.
Some lenders require borrowers to maintain PMI for a minimum time period, usually two years, regardless of the equity in their home. Therefore, it is best to avoid PMI in the first place to avoid this costly fee.
