Still Paying PMI?

I just got back from meeting with my friend for lunch and somehow we got on the topic of mortgages. He bought a pretty large house (more than he could afford) about 3 years ago. He couldn’t come up with the 20% and is stuck paying Private Mortgage Insurance (PMI). PMI is a portion of your mortgage that you pay to the lender as insurance to them that you can make the payment. You usually pay PMI if you can’t put 20% down on a loan. This also insulates the lender from market fluctuations where the value of the house could be less than the outstanding loan amount, like the current housing mess that is going on now.

Anyway, he took out a 30 year fixed mortgage, so odds are he’s paid some principal down. I told him that he really needs to get rid of the PMI. It is wasted money since it doesn’t go toward your mortgage at all. One thing I recommened he do is refinance with a 80/10/10 loan. What this means is that you take out a mortgage for 80% of the value of the loan, you put 10% down and the other 10% is put into a home equity loan. The 10% down and the 10% home equity loan satisifies the 20% down on the first loan thus avoiding PMI. You can do this same thing when purchasing a home, not just with refinancing.

There are many ways to avoid PMI these days so don’t opt for it just because you don’t have the full 20%. PMI is also very difficult to get out of once you have it on a mortgage. You have to have the lender review the loan to see if the home as increased in equity to satisfy the 20% needed to avoid paying it. You can imagine how hard this must be these days as values are actually decreasing. Your only other way is to refinance, but that can cost you some closing costs.

These days, there is no sense paying more money than you need to, that the would-be PMI and save it for a rainy day instead!

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