If you want to buy a home for yourself, taking a mortgage loan, you need to make a 20% down payment of the total loan amount. If, you are unable to make a 20% down payment, you need to pay for private mortgage insurance (PMI).

PMI or private mortgage insurance plays a vital role in the mortgage industry. It ensures safety to the lenders, in case you are unable to repay the loan. As a borrower, you will benefit from this insurance by enabling to get the loan, making down payment, as little as 3% to 5%.

Cost of PMI

The average costs of private mortgage insurance may vary, but, they range between 1%-1.5% of the loan amount. It also depends on the size of the down payment and other loan terms and conditions. You will not get any tax benefit for the premiums you will pay towards PMI. However, if your income is less than $100,000, you will get tax deduction.
Say, you have taken a $200,000 loan for a 30-year loan term, the interest rate is 7.5%. You have made a down payment of 10%. Then you need to pay 2 months PMI escrow of $156, and your monthly PMI premiums will be $78, for the first 20 years and $30 for the next 10 years.

How to avoid PMI

You can avoid paying for private mortgage insurance, by the following ways:

Use an 80-10-10 loan: You need to take two loans for this program. The first loan is 90% financed with a first mortgage, which will equal to the 80% of the sale price, and the second loan will be for remaining 10% of the sale price. The interest rate on the second mortgage will be higher, but, as it is to only 1%, the total monthly payments on the two loans will be lower than the monthly PMIs.

Pay more interest: If you accept a higher interest rate on your mortgage loan, the lender may waive off the PMI. The interest you will pay towards your loan will be tax deductible.

How to terminate PMI

You can terminate monthly PMI, if you have paid the loan balance down to 78% of the actual buying price. Under Homeowner’s Protection Act (HPA) of 1998, when you have paid down your mortgage to the 80% of your loan amount or your home appraisal value is 80% of the original purchase price, at the time of obtaining the loan, you can request your lender to cancel the PMI. You also need to have a good repayment history.
You can take advantage of PMI and pay less towards mortgage down payment and turn your dream of owning a home into a reality.