What is PMI

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What is PMI
What is PMI and why do I have to pay it? These are questions that has been around for a long time and very common for any homeowner to ask. PMI is also known as Private Mortgage Insurance. PMI is charged on conforming loans when a buyer does not put down a 20 percent down payment or greater. PMI insures the lender in case you default on your loan. So basically you are paying for insurance for the bank with this type of insurance.

The tax deductibility of the PMI is only for acquisitions or purchase loans. Refinance loans are not eligible for PMI write offs.

Private Mortgage Insurance (PMI) is also called Lenders Mortgage Insurance (LMI). PMI is paid by the borrower as insurance to the lender to compensate for the possibility that the borrower defaults and cannot repay the loan.

PMI is required on Conforming and Jumbo Loans when the Loan-to-Value (LTV) is greater than 80%. The PMI premium can be paid upfront or monthly. The premium generally ranges from .25% to .90 of the loan amount depending on the LTV. PMI is not a deductible tax expense. PMI is commonly avoided by utilization of a 2nd mortgage (piggyback) in combination with the 1st mortgage so that the LTV will be 80% or less. The difference needed is then obtained through the 2nd mortgage ie: 80/10/10 or 80/15/5.

Some banks and lenders offer loans with no PMI. Don't be mislead as the premium is already built-into the quoted rate. The advantage is that you do not need to obtain PMI approval and because the PMI is added as an increase in the interest rate it is deductible. The disadvantage is that unlike traditional PMI it can not be dropped unless the borrower refinances.

One way to avoid PMI is to take out two mortgages. If your first mortgage is less than or equal to 80% of the purchase price, you are not required to pay mortgage insurance. Since you are not required to pay mortgage insurance on a second mortgage you can add a second mortgage for 20 percent of the purchase price for a total of 100 % financing without paying mortgage insurance.

Private Mortgage Insurance policy premium is a recurring expense for the homeowner. The premium is based on the loan-to-value ratio (loan amount divided by property value). The higher the Loan To Value over 80%, the higher the monthly PMI premium would be. If a homeowner has a mortgage loan with a PMI feature, he can eliminate the bank's requirement of buying PMI by refinancing into a mortgage without a PMI feature.

Now days PMI pricing is risk based. A customer with a 620 FICO score a a bankruptcy should expect to pay more for PMI than a customer with a 720 FICO score can clean credit history. Be sure to ask your mortgage agent about the cost of your PMI and discuss any options to improve it.

One recent change now makes PMI tax deductible for 2007. The tax deduction only applies to mortgages that are closed in 2007 and you only get the full deduction if your adjusted gross income is $100k or less per year, with no deduction if you make more than $110k yearly.

So far, this is a one-year deal; Congress would need to renew the deduction to make it stick for the ‘08 tax year and after.

Contact your tax professional or mortgage expert for more information on this and other tax deductions you may be eligible for.

Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent.

PMI isn't a bad thing — it allows you to make a lower down payment and still qualify for a mortgage loan. In fact without PMI, many of us would not be able to purchase our first home.

PMI or Private Mortgage Insurance is easily avoided with an 80/20 loan.


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