What Is PMI and Why Do I Need It?

PMI, or Primary Mortgage Insurance, protects the lender (bank) in the event that your home ends up in foreclosure. When applying for a home loan, lenders typically require you to put a 20% down payment on the home. If you are unable to put down 20% or more, or do not have the required funds to do so, then lenders will typically look at the loan as a riskier investment for their balance sheet and will require a PMI payment.

The PMI is usually paid monthly and included in the mortgage payment to the lender. After several years of paying on the loan and once you have paid enough towards the principle amount to cover the initial 20% down payment, you can contact the lender and ask that the PMI payment be removed. Many borrowers either forget or do not know that the PMI can be removed once the accepted level is achieved, and thus miss out on the savings.

If you’re unable to put 20% down on your home purchase but don’t want to have to pay the PMI, you can use an alternative strategy. By taking out a smaller loan (typically at a higher interest rate) to cover the amount of the 20% down you are unable to pay out of pocket, you can avoid having to make a PMI payment. This is commonly known as “Piggybacking,” however if you decide to take this route, keep in mind that you are now committed to two loans in exchange for not having to make your PMI payment. You can typically deduct the interest on both loans on your federal tax return too if you are itemizing deductions, which is common among homeowners.

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