Private Mortgage Insurance or PMI
Homebuyers may face paying for private mortgage insurance, or PMI, if they are putting less than a twenty percent down payment on their new home. This monthly mortgage insurance remains in effect until the borrower has made principal payments to have twenty percent equity or appreciation now gives them at least twenty percent equity. Some mortgage lenders now offer programs to remove PMI. These new programs offer borrowers an eight percent first mortgage and a fifteen percent second mortgage with a five percent down payment. This loan is PMI free.
Here is an example; Let’s say a buyer is buying a house for $250,000. The buyer could take out a first mortgage for $200,000 or eighty percent of the purchase price. The buyer can also arrange for a second mortgage of $37,500 which is fifteen percent of the purchase price. The buyer would then make a down payment of five percent. This refers to an 80-15-5 program. In this situation, the mortgage lender would not require the buyer to purchase private mortgage insurance, which would cost about $100 per month.
An additional advantage of the 80-15-5 program is that the mortgage interest on the second mortgage is tax deductible. PMI insurance premiums are not deductible, but legislation has been introduced to allow PMI to be deductible as well.
