What is PMI (private mortgage insurance) and is it necessary?Answer:
What is PMI (private mortgage insurance) is important to know if you can't come up with 20% down payment.
One doesn't need PMI if they need a loan with 80% LTV. Other than that, homebuyers need to know what PMI (private mortgage insurance) is - this is protection for the lender for up to 20% of the loan amount. If anything goes wrong with the mortgage payments, the lender will receive up to 20% of the loan amount from the insurer and the outstanding balance will be repaid through sale or foreclosure.
Is it possible to avoid PMI (private mortgage insurance)?
In a way, no. Every lender will insist on the homebuyer purchasing PMI. However, currently PMI is tax deductible for lower income families through 2010. Those, who are not eligible to benefit from PMI tax deduction - the good news is PMI can be cancelled when 20% of equity is reached; or the lender will automatically cancel it when 22% equity is reached.
If one, however, wants to avoid paying PMI (private mortgage insurance) they could use an 80-10-10 or 80-15-5 combination loan, using a second mortgage or a home equity loan or line of credit, which is tax deductible in most cases and helps avoid PMI.
Another way to not pay for PMI (private mortgage insurance) is to take higher rate on the mortgage loan. If you are staying only for a short time in the house, taking a higher rate may be a good way to go; in the long run, it can still be a good option but you will need a calculator to make the right choice, putting in your income, tax bracket, loan amount, years to keep the property, etc.
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