Should I pay PMI or go with the loan with a higher interest rate but no PMI? This is a choice many borrowers face when deciding on a loan. There are many pros and cons for each choice. Borrowers should talk to an experienced Mortgage Consultant or Financial Consultant to help with their decision.
Review your options when it comes to PMI. Currently it's tax deductible but it's on a year to year basis.
Private Mortgage Insurance (PMI) must be maintain until the loan balance falls below 78% loan-to-value (LTV) ratio. The decision on getting a loan with a higher interest rate or one with PMI depends partly on how long for the loan to reach 78%. Also, home owners tend to opt for mortgages with PMI if they intend to refinance in the near future.
As of January 1, 2007, mortgage insurance is tax deductible for purchase and refinance loans for borrowers with adjustable gross income of $100,000 or less. Be sure to discuss this with a CPA or tax professional whether this can apply to your situation.
There are some that feel that PMI deductions are temporary and others claim its here to stay. Consult with your mortgage professional about a 80/20 mortgage or a piggy back loan to compare choices.
The decision whether to pay PMI or take the loan with the higher rate but no PMI take into consideration the fact that PMI is not tax deductible. A mortgage broker can help you compare the two choices.
Ask your loan officer about the No PMI Option
There are loans out there where PMI is not required and your interest rate will not be effected as well. For example, keeping your LTV (loan to value) below 80% will allow you to not pay PMI with any loan, where it may just be a lender that does not require it.
PMI is not tax deductible, but mortgage interest is. You will want to take that factor into consideration when making your choice.
Some lenders pay the mortgage insurance on loans over 80% by raising the rate by a small fraction. This allows the borrower to get one loan and not having an additional expense which is not deductible on one's taxes.
Why do lenders charge PMI if your loan is above 80% LTV? Studies have shown that most foreclosures happen before the borrower has 20% of the mortgage's principal paid off. So, loans with an LTV of 80% or higher pose a greater risk to the lender.
You may also choose to do a combo mortgage like an 80/20 to avoid PMI. A combo mortgage carries with it a higher rate
on the second mortgage. Even with a higher rate second the borrower often comes out ahead when compared to a traditional loan with PMI.
There are also some loan programs now available that do one loan up to 100% with no PMI, ask your Loan Officer for more details.
Some savvy buyers will negotiate for the seller to pay the PMI as a one time up front charge. Be sure to ask your Loan Officer and Realtor if seller paid PMI is an option for you.
There are also some lenders that offer a lender paid MI program. On pay option loans they will usually increase the start rate of the loan.