The average homeowner is voluntarily throwing away 1,000’s of dollars every year in unnecessary mortgage payments called Private Mortgage Insurance (PMI). This article will briefly describe what Private Mortgage Insurance is, what it REALLY costs and most importantly how to avoid it.

PMI is an insurance policy required by most lenders when you are putting less than 20% down on a home purchase. Some loans programs even require more than 20% equity before waving the requirement for mortgage insurance. This insurance pays out to a lender in case you default on your mortgage loan payments and the lender has to foreclose. The policy does NOT protect you if you lose your job or can not make payments on your mortgage for some reason. However, even though you are not protected by the policy you are the one paying for it; and unlike mortgage interest expense it is not tax deductible.

On average, mortgage insurance costs about $60 per month per $100,000 of loan amount. It is very expensive. On a $200,000 mortgage that equals $1,440 per year and you get NO tax deduction for it. More importantly, you also have lost the opportunity to use this money somewhere else. If you structure your mortgage so that you do not have to pay PMI and instead invest just the first 5 years worth of monthly payment savings into your retirement account, over the course of 30 years this money would grow to over $160,000. And this lost opportunity cost of $160,000 plus dollars is the real cost and tragedy of paying mortgage insurance.

HOW TO AVOID HAVING TO PAY PMI ON YOUR MORTGAGE

The following methods for avoiding having to pay mortgage insurance can be used whether you are buying a new property or refinancing an existing property. The two most popular methods are:

First the 80/10/10 or 80/15/ 5 – which stands for an 80% First mortgage, a 10% 2^nd mortgage, and 10% or 5% down payment or equity in the property. This is the best method in my opinion and the one I use most often. Since PMI only applies to first trusts or primary mortgages – we structure a first trust to be no greater than 80% of the value of the property – we then couple that with a second trust for the remaining moneys that are needed. Thereby achieving the total dollar amount needed to make the loan but also waving the need for PMI by keeping the first trust at 80% Loan To Value.

Second, another popular method is to find a lender that will allow you to finance the PMI into your mortgage interest rate. Some lenders will do this and others will not. The idea is simple though. You agree to accept a slightly increased interest rate typically a ¼% increase in your rate and the lender then pays the PMI for you. The advantage of this method is that the money you would have paid in Private Mortgage Insurance is now a part of your interest payment against your loan and is now tax deductible.

Finally, there are many different ways of saving money on our monthly mortgage obligations as well as our other liabilities. This concept of viewing liabilities as part of our overall financial plan is important not only to help us save money but critical for us to be able to achieve financial security.

Private Mortgage Insurance is carried on your mortgage loan a number of different ways – it may be listed as PMI or MIP or simply as mortgage insurance. You can also call your lender to find out – and once your Equity in your property equals or exceeds 25% of the value of the property the mortgage insurance can be dropped – BUT YOU HAVE TO REQUEST FROM YOUR LENDER THAT IT BE DROPPED- it won’t automatically be done.

There is currently legislation before the US Congress that, if passed into law, would allow PMI to become a tax-deductible expense just like mortgage interest expense. 

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