What is PMI, and does everyone need to pay it?

By Steven Merkel AAA
A:

Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary mortgage and no longer make payments and the home ends up going into foreclosure. When applying for a home loan, lenders typically require that a borrower provides a 20% down payment on the home. If the borrower is unable to put down 20% or more, or does not have the required funds to do so, then lenders will typically look at the loan as a riskier investment for their balance sheet and will require a PMI payment from the borrower.

The PMI payment is usually paid monthly as part of the overall mortgage payment to the lender. Over several years of paying on the loan and once the borrower has paid enough towards the principal amount of the loan (to cover the 20%), they can contact their lender and ask that the PMI payment be removed. Many borrowers either forget or do not know that PMI can be removed once the accepted level is achieved.

Another way to avoid the PMI payment is by taking out a smaller loan (typically at a higher interest rate) to cover the amount of the 20% down, this is commonly known as "Piggybacking". Now the borrower is committed on two loans, but since the funds from the second loan are used to pay the 20% deposit, the borrower can avoid the PMI payment. The borrower can typically deduct the interest on both loans on their federal tax return if they are itemizing deductions, which most homeowners do anyways. (For related reading, take a look at Outsmart Private Mortgage Insurance.)

This question was answered by Steven Merkel.

RELATED FAQS

  1. Where are home values falling the fastest in the US, and why?

    Learn about the metropolitan areas in the United States experiencing the largest drops in median single family homes values ...
  2. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  3. How do traders use the ABX index?

    Learn about some of the ways traders, banks and even hedge funds have traditionally used the ABX indices to make bets on ...
  4. What's the difference between a secured line of credit and an unsecured line of credit?

    Discover the differences between a secured line of credit and an unsecured line of credit, and why lenders treat the two ...
RELATED TERMS
  1. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  2. Forbearance

    A temporary postponement of mortgage payments.
  3. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes ...
  4. USDA Non-Streamlined Refinancing

    A mortgage-refinancing option offered by the United States Department ...
  5. No-Appraisal Mortgage

    A type of home loan used for refinancing for which the lender ...
  6. No-Appraisal Refinancing

    A type of mortgage for which the lender does not require an independent, ...

You May Also Like

Related Articles
  1. FHA mortgages offer flexibility and low down payments, though they're often pricier than traditional loans backed by private mortgage insurance.
    Credit & Loans

    Before You Choose An FHA Mortgage: 7 ...

  2. FHA loans are often a good alternative for those who have trouble obtaining a conventional mortgage, although you do have to pay an insurance premium.
    Home & Auto

    Mortgage For A Manufactured Home? Try ...

  3. You're probably moving a lot and still paying off your student loans. Is it crazy to get a mortgage in your 20s? Here's how to decide.
    Credit & Loans

    Does A Mortgage Make Sense If You're ...

  4. The credit crunch and recession caused financial fear, so it's no great shock that our borrowing habits have changed from less than a decade ago.
    Credit & Loans

    How Our Borrowing Habits Have Changed ...

  5. An article explaining the reader when it makes sense to buy home with cash vs taking a mortgage loan. Most time people would think that having the money to purchase the house is better than a mortgage loan but is it always the case?
    Credit & Loans

    Buying A Home: Cash Vs. Mortgage

Trading Center