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Ways to avoid Private Mortgage Insurance

Private Mortgage Insurance (PMI) is required for home buyers who do not put down a 20 percent payment on their new home. In general, PMI costs about half of one percent of the loan. That can amount to a lot of money over time. There are some new ways to avoid mortgage insurance even when you don't have the standard 20 percent down payment however.

Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. Depending on the down payment, the rate increases generally range from .75 percent to 1 percent. The advantage is that mortgage interest is tax deductible, and PMI premiums are not.

You can avoid PMI by using an "80-10-10" loan as well. This program involves two loans and a 10 percent down payment. The 90 percent loan is financed with a first mortgage equal to 80 percent of the sale price, and a second mortgage for the remaining 10 percent of the sale price. The second mortgage has a higher interest rate but since it applies to only 10 percent of the total loan, the monthly payments on the two mortgages are still lower than paying one mortgage with mortgage insurance. Once again, there is the advantage of the mortgage interest being tax deductible as well.

It’s always advised to look into every single option you have before buying a home. Ways to avoid paying PMI are just one more thing to consider before closing the deal.