SmartCapitalist.com

Avoiding PMI

Tuesday, February 07, 2006
When investing in a house, you will find that a bank will charge you PMI (Private Mortgage Insurance) on anything beyond an 80% mortgage. This Private Mortgage Insurance accounts for the likelihood that a highly leveraged property is foreclosed on more often than properties that are not so highly leveraged.

The problem with paying PMI is that it eats away at your cashflow. A typical payment towards this insurance is $45 per $100,000 of principal. The biggest problem with investors paying PMI is that it is not tax deductible, at least not on the personal income tax level. It may be deductible for a corporation, but I have not talked to a tax accountant about that yet. Knowing that it is not tax deductible, there are still ways around paying Private Mortgage Insurance.

Paying More Down
The most obvious way to avoid PMI is to pay more money down on your property. The problem with this is that most real estate investors would rather buy more property with that extra money. Either that, or 20% is just impractical with your current financial situation.

A 15 80 Loan
A popular approach to avoiding Mortgage Insurance is to get a first mortgage for 80 percent, then finance 15 percent of the loan with what is called a piggyback loan. This loan will most often be provided through another institution, and will be at a higher rate than the original loan. However, it may result in lower payments than the loan with PMI. The 15% can be on a shorter term too, which will create an even better payment after a few years.

Seller Financing
It may be possible to get the seller to help you out on the down payment. I believe there is a fee for doing such a transaction because it involves a third party, however, instead of going down so much on the price, you could agree that the seller will pay you x percent towards the down payment at closing. Since this will work out to the same dollar amount for the seller, they might agree to such a thing.

It is important to realize that PMI on most loans is not permanent, and you only pay it until you reach a 20% equity in the property. Some mortgage companies will have a minimum number of years that Insurance will have to be paid for. The particular loan I am getting has a 5 year minimum on PMI.