How can I avoid PMI?

PMI or Private Mortgage Insurance is a policy which protects the lender who loans money, at a high loan to value, in case you default. Whenever you borrow more than 80% of the price of a home that you are purchasing or refinancing lenders will usually require a PMI policy. The policy is usually paid by you when you make your monthly mortgage payment. The monthly PMI cost is determined by:

1. The type of loan you receive

2. How much of the value of your home you finance above 80%

3. Your loan amount

How can you avoid PMI? There are a couple of ways:

1. Get a non-conforming loan. This is usually not a good idea because of the high interest rate you will be charged for the loan. The lender needs to charge the higher interest rates because the lender is taking alot more risk on your loan. What lenders understand is that if they ever had to foreclose on your property they would most likely receive only 80% of the homes value when they sell it. That is the reason for PMI on loans for over 80% of the value of a home.

2. Use a Tax Advantaged Mortgage Insurance product. This was a great idea used by many lenders because it effectively gave you more tax deductable interest annually without the larger standard monthly PMI cost. This was great that is until the government said we will now allow you to use PMI payments as tax deductions. Once this happened there was very little use for TAMI programs.

Manly because anyone getting a TAMI program would pay the increased interest rate over the entire term of there mortgage. Thirty years can be a long time to pay the extra rate.

Currently, it is almost always cheaper to pay PMI  when you borrow more than 80% of the value of your home. Then get rid of the PMI as soon as you have enough equity to do so. The rule to get rid of PMI is as follows: (This is Fannie Mae's current rule and may change at any time)

1. The lender must automatically remove the PMI once you have paid your mortgage down to 78% of the homes value when you took out your mortgage.

2. During the 1st 5 years of the mortgage. If you know your home has appreciated alot over the past few years and you have at least 25% equity in your home based on an appraisal done today you can have the lender remove the PMI. Please note that you must pay for the new appraisal and the lender will choose the appraiser. So be sure you have the needed equity before paying for the appraisal.

3. After the first 5 years you will only need to have 20% equity in your home based on an appraisal done today you can have the lender remove the PMI.