Avoid Paying Private Mortgage Insurance

Private mortgage insurance (PMI) is a gimmick that many lenders put into place to presumably protect their loans from lenders who may default on a mortgage or home mortgage refinancing. But in reality, it is just another way a lender is able to make big money on new mortgage rates where the lender doesn’t put a full 20% down.

Oftentimes, buyers either don’t have the full 20 percent or don’t want to put that much of a down payment on their home mortgage refinance loan. For those that don‘t want to pay private mortgage insurance, lenders have developed a system known as piggy back loans to allow a borrower to take a second mortgage or equity home mortgage line of credit to make up the difference between the amount of money he will contribute as a down payment and the balance owed to make the full 20 percent down payment.

Private mortgage insurance is actually very expensive, and taking a second loan to make up the difference between a borrower’s down payment and the balance toward that 20 percent turns out to be less expensive in the long run even when the home mortgage refinance rate or new interest rate on the second mortgage is higher than on the first. The added benefit to using a piggy back loan to avoid paying mortgage insurance is that you can do a double closing at the same time you close on your fist loan saving additional fees.

Another benefit of having the equity home mortgage or second mortgages in general, is that it is tax deductible in most states. Speak to your accountant before making any decisions. At times you may be able to have your second mortgage set up to give you the benefit of practical use. This may be arranged by taking out a revolving line of credit known as a home equity line which allows the borrower to make withdrawals on the available balance for home improvements or other expenses.

If you have 20 percent equity in your house, by law, the lender is required to not charge for private mortgage insurance, and all you have to do is tell them you will not pay it. If you do end up having to pay the private mortgage insurance due to not having the equity in the home and not being able to get a second mortgage, the lender is required to drop the extra mortgage insurance when your home reaches a threshold of 22 percent equity. Speak to your lender or an advisor for more information about your particular situation.