Should I Pay PMI or the Higher Interest Rate - Should I pay PMI or go with the loan with a higher interest rate but no PMI? This is a choice many borrowers face when deciding on a loan. There are many pros and cons for each choice. Borrowers should talk to an experienced Mortgage Consultant or Financial Consultant to help with their decision.

Private Mortgage Insurance (PMI) must be maintain until the loan balance falls below 78% loan-to-value (LTV) ratio. The decision on getting a loan with a higher interest rate or one with PMI depends partly on how long for the loan to reach 78%. Also, home owners tend to opt for mortgages with PMI if they intend to refinance in the near future.

There are loans out there where PMI is not required and your interest rate will not be effected as well. For example, keeping your LTV (loan to value) below 80% will allow you to not pay PMI with any loan, where it may just be a lender that does not require it.

PMI is not tax deductible, but mortgage interest is. You will want to take that factor into consideration when making your choice.

Some lenders pay the mortgage insurance on loans over 80% by raising the rate by a small fraction. This allows the borrower to get one loan and not having an additional expense which is not deductible on one's taxes.

Why do lenders charge PMI if your loan is above 80% LTV? Studies have shown that most foreclosures happen before the borrower has 20% of the mortgage's principal paid off. So, loans with an LTV of 80% or higher pose a greater risk to the lender.

You may also choose to do a combo mortgage like an 80/20 to avoid PMI. A combo mortgage carries with it a higher rate
on the second mortgage. Even with a higher rate second the borrower often comes out ahead when compared to a traditional loan with PMI.

There are also some loan programs now available that do one loan up to 100% with no PMI, ask your Loan Officer for more details.

Some savvy buyers will negotiate for the seller to pay the PMI as a one time up front charge. Be sure to ask your Loan Officer and Realtor if seller paid PMI is an option for you.

There are also some lenders that offer a lender paid MI program. On pay option loans they will usually increase the start rate of the loan.

PMI - The New Rules - PMI or Private Mortgage Insurace is a way for lenders to protect themselves in higher risk loans. PMI usually kicks in when a loan is more than 80% of Loan to Value (LTV). There are alternatives to PMI but make sure you know of the new tax benefits that PMI allows on purchases or refis made after January 1, 2007.

One caveat concerning the new rules and tax deductibility of PMI. It is only available for new purchases or acquisitions. Refinances are not eligible for tax deductions under the new tax laws.

PMI, also known as Private Mortgage Insurance is a type of insurance that protects the lender in the event that you are unable to make your mortgage payments as scheduled and your home is foreclosed upon. This insurance does not protect you the buyer or save you from losing your home, but it protects the lenders investment. PMI is normally required anytime you do not have 20% down or 20% equity in your home. There are some ways around PMI that may be able to save you money off of your monthly mortgage payment, however with the new PMI rules that went into effect on January 1st of 2007, you should consider possibly wanting to pay PMI versus the other ways to get around PMI. One such way to avoid paying PMI, probably the most common way, is to obtain a combo loan. A combo loan is a first and second mortgage, where your first mortgage is 80% of the value of the home and the second mortgage is the remaining percentage of the loan that you are over 80%. These types of loans are still going to be very good options for many people, but it is going to depend on each person's financial goals on which option is going to be best for them. Ask your mortgage professional for more information about PMI and the new rules and also if PMI might be right for you.

The biggest deductions you get under the new PMI rules is when your AGI (adjusted gross income) is under $100,000 for couple files jointly or $50,000 for filing as a single person. You are then able to deduct 100% of the PMI you have paid over the course of the year. Above that amount then your deduction decrease by 10% for every $1000 AGI above the $100,000 or $50,000 cap. In other words, the deduction disappears for those couple who have a AGI above $110,000 or single filers above $60,000.

Ending Your PMI Early - Private mortgage insurance, or PMI, is the safety net of the lender. PMI benefits lenders because it guarantees payment on the balance of loans not covered by the sale of foreclosed properties.
If a borrower makes a down payment of 20% of the cost of the home, the lender can generally trust that he will make his mortgage payments faithfully to protect a large investment. In this case, the lender comes out ahead if the borrower is forced to foreclose on his house, because the lender loans 80% of the cost of the house, but will probably recover 100% of the cost of the house. But, if the borrower makes a smaller down-payment, such as 3%, 5% or 10%, and borrows the rest, and then defaults on his loan, the lender loses money.

PMI tax deductible in 2007 - New legislation allows taxpayers who itemize their deductions to deduct premiums paid for mortgage insurance - which typically is required when home buyers purchase their homes with less than 20 percent down. Currently, only the interest paid on ones mortgage is deductible if the taxpayer itemizes deductions.

Depending on your credit, you may also qualify for a loan with less than 20% down with no separate mortgage insurance payment required.

The new tax code was written so that mortgage insurance will be deductible if you purchase a home in 2007, but will NOT apply to mortgage insurance on existing mortgages.

Based on the new legislation passed December 9, 2006, the provision is effective for transactions closed after December 31, 2006. MI premiums paid between January 1 and December 31, 2007 may qualify for tax deductibility on borrowers’ subsequent federal tax returns as follows:

Borrowers with adjusted gross incomes below $100,000 may deduct 100% of their MI premiums.

Deductions are phased out at 10% increments for borrowers with adjusted gross incomes between $100,000 and $109,000.

This new legislation helps low- and moderate-income Americans overcome barriers to homeownership. By making mortgage insurance tax-deductible, Congress is addressing the key issue of housing affordability for many homebuyers.

Mortgage insurance can be avoided by utilizing a second mortgage for the amount needed to complete your transaction above the standard 80% loan to value of the first mortgage. An example is as follows: you are purchasing a home for $200,000. You plan on obtaining a mortgage for $180,000 or 90% loan to value. Instead of obtaining a 90% LTV mortgage and paying mortgage insurance, you can simply obtain a first mortgage of $160,000 and a second mortgage from the same lender for $20,000 and avoid the mortgage insurance all together. This has become a commmon way to approach a high loan to value transaction. Ask your mortgage professional to explain the cost benefits of each approach so you can make the decision that best suits your particular situation.

There is an alternative to high rate second mortgages (commonly called combo loans) and hard to understand mortgage insurance premiums. It's called Lender Paid Mortgage Insurance, and allows you to roll a mortgage insurance premium into your mortgage payment. Depending on your credit, this can be a more convenient and less expensive alternative to mortgage insurance.

If your credit is less than perfect, we have a variety of programs which can allow you to borrow up to 100% of the value of your home with no mortgage insurance at all. In many cases, the total monthly payment on one 100% loan with no mortgage insurance is lower than an 80/20 combo payment for a borrower with slightly higher credit!

Paying for PMI Upfront? - Can I pay for PMI upfront?

There are several alternatives to paying PMI monthly. One alternative is some times referred to as Tax Advantage MI. This type of MI is paid for in the interest rate. An adjustment is made to the interest rate so that you have approximately the same monthly payments but the increased interest rate means more of the payment is tax deductible

Some types of loans require you to pay for mortgage insurance up front. A FHA loan is one example of this, where you are charged an Up Front Mortgage Insurance Premium (UFMIP) that is 1.5% of the loan amount. This is actually in addition to the monthly mortgage insurance you pay. However if you sell, refinance, or payoff you loan within the first 5 years you will receive a portion of the UFMIP back in the form of a refund.

You can pay for your mortgage insurance premium up front on most conventional loans. This is very worth while to look into and ask your mortgage professional about. While you will have to either pay for this large amount of money up front or finance it into your loan amount, many times you can save thousands of dollars by paying for the entire premium up front versus paying it monthly. Also, consider looking into a lower term for your financing than 30 years. By financing on a 25, 20 or even a 15 year mortgage or lower you can usually save a lot of money on PMI charges.

One tool that many savvy home buyers use is to have the seller pay for their PMI as a single upfront charge. For this to work you will need the services of a Realtor good with contracts and a seller that is willing to negotiate. Seller Paid Private Mortgage Insurance is usually accomplished through the use of a seller concession, where the seller helps the buyer with some or all of the closing costs.

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