Private Mortgage Insurance - Private Mortgage Insurance (PMI) is insurance paid by a borrower and required by many lenders when the borrower is financing more than 80% of the value of the home. Many consumers are under the mistaken notion that this insurance protects the borrower under circumstances such as the death of the borrower or the borrower is unable to make timely payments. Do not be mistaken, PMI only exists to protect the lender in case they must take back your house.For borrowers who deduct their mortgage interest from their taxes every year, there is also something called TAMI, or Tax Advantaged Mortgage Insurance. TAMI is different from PMI in that you will still pay mortgage insurance, but rather than paying a premium, you will have a higher interest rate. This essentially allows you to deduct the mortgage insurance from your taxes at the end of the year.
Private Mortgage Insurance is a recurring monthly expense to the homeowner. In most cases, homeowners can stop buying this insurance when the loan balance is paid down to 75% of the purchase price, or when the home value has appreciated so the loan balance is 80% of the new appraised value.
Since PMI does not benefit the borrower in any way, you should generally try to avoid paying it. Since PMI is only paid for loans in excess of 80% of the value of the home, you can avoid paying it by splitting the loan in two. You could have a first mortgage for 80% of the value, and a second mortgage for 20% of the value.
Although this would prevent the need for Private Mortgage Insurance, you will end up paying a higher interest rate on the second mortgage, since it represents a greater risk for the lender.
PMI is Private Mortgage Insurance. It is generally required in the U.S. for home loans which are greater than 80% of the purchase price of the home. PMI can be avoided by receiving an alternate form of financing such as an 80/20 combo.
