How Much Is My House Worth

Reason to buy PMI and ways to avoid it

If you dream of buying a home for yourself but don’t have the required amount of 20% down payment of the total loan amount, you need to buy private mortgage insurance or PMI to buy your real estate property.  

Private mortgage insurance or PMI is the extra insurance you need to buy to insure your lenders, in case you fail to repay the mortgage for your real estate property.  

How much does PMI cost

Here’s an example to have an idea of the cost of PMI. Say, you have taken a loan of $200,000, of interest rate 7.5% and your loan term is 30 years. If you can make 5% down payment, your monthly PMI premium for the first 20 years will be $247 and for the next 10 years will be $124. 

How to avoid PMI

You can do the things mentioned below to avoid paying for PMI even if you don’t have 20% down payment.  

Use an ‘80-10-10’ loan: If you cannot afford to make more than 10% down payment, you have to take a second mortgage. The first mortgage will be equal to 80% of the sale price and the second mortgage will be for the outstanding 10% of the sale price. Generally the interest rate is higher for the second mortgage, but, as you are paying for only 10%, the combined monthly payment for the two mortgages will be less than paying mortgage with private mortgage insurance.

More interest: Your lender can waive off your private mortgage insurance if you offer to pay higher interest rate on your loan. You will benefit from this as you will get tax deduction for your interest. 

Private mortgage is beneficial to you because it gives you an option to buy a real estate property with a little down payment.