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. What is the underwriter's job in a real estate transaction?

    Find out why the underwriter may be the most important person in your real estate transaction, and learn what information ...
  2. Why do bankers incur risk when underwriting?

    Learn why investment banks take on risk when underwriting. Explore examples of investment banks that have underwritten assets ...
  3. Are APRs different in different countries?

    Learn about the term APR and how it is used in the United States and other countries. Explore why different lenders charge ...
  4. What loans do and don't have an APR?

    Learn about what annual percentage rates (APR) are and what they mean. Explore different fixed and variable APRs charge by ...
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. Stock Analysis

    How Two Harbors' Derivatives Work?

  2. Stock Analysis

    How Chimera Investment Bear The Brunt ...

  3. Stock Analysis

    How Are Interest Rates Affecting Annaly ...

  4. Investing

    Ready To Invest In Financial Leverage ...

  5. Trading Strategies

    Eyeing a Loan? Consider Skipping the ...

Trading Center