6 Reasons To Avoid Private Mortgage Insurance

Published on Wednesday, 29 February 2012 23:51 Written by Glenn Custis

If you're thinking of buying a home, remember you're going to need to save up enough money for a 20% down payment. If you can't, it's a safe bet that your lender will force you to secure private mortgage insurance (PMI) prior to signing off on the loan. The purpose of the insurance is to protect the mortgage company if you default on the note.

SEE: Understanding The Mortgage Payment Structure

Private mortgage insurance sounds like a great way to buy a house without having to save up the cash for a down payment. Sometimes it is the only, or even the best, option for new homebuyers. However, there are several reasons would-be homeowners should try to avoid paying this insurance. In this article, we'll examine the six common problems with PMI and then explore a possible solution that allows homebuyers to avoid it altogether.

Six Good Reasons to Avoid PMI

1. Cost - Private mortgage insurance typically costs between 0.5% to 1% of the entire loan amount on an annual basis. On a $100,000 loan this means the homeowner could be paying as much as $1,000 a year, or $83.33 per month - assuming a 1% PMI fee. (Calculated as: $100,000 x 1% = $1,000 / 12 = $83.33) By itself that's a pretty hefty sum. However, the average home price, according to the National Association of Realtors is about $230,000, which means families could be spending nearly $200 a month on the insurance. That's as much as a car payment! 

2. May Not Be Deductible - Private mortgage insurance contracts are tax deductible - that is, if the married taxpayer earns less than $110,000 per year (in adjusted gross income).

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