Avoiding Private Mortgage Insurance
July 8th, 08The 20% down payment needed to purchase a home can be very difficult for some first time buyers to come up with. Quite often, it will be necessary for the homebuyers to get some type of private mortgage insurance in order to buy their house. Private mortgage insurance can be of great assistance in bypassing this first obstacle in your transaction, but it can create others. Your house payments will be higher each month and you won’t be able to deduct the difference when you file your taxes. While most homebuyers would like to avoid these problems and the 20% down payment, how do they avoid using private mortgage insurance?
A small amount of information can be helpful to the borrower to ease their concerns about the long-term consequences of using private mortgage insurance. Specific guidelines which are written in the Homeowners Protection Act state that the borrower can be relieved of the higher expenses of private mortgage insurance by paying 22% equity. The suspension and cancellation of this insurance is guaranteed by those provisions. This can help you feel a bit relieved about the burden of your monthly payments. Some instances where government issued FHA or VA mortgages are higher risk loan situations, the rules of the Home Owners Protection Act may apply differently.
A popular alternative to taking out private mortgage insurance is to obtain what is called a piggyback loan. These forms of loans can be used to reduce a large percentage of your home’s sale price through a loan or by applying for a mortgage. This is will be followed by taking out a second mortgage at usually 5-15%. Your second mortgage will have a higher interest rate, but it still will be better than the amount you would pay over time using private mortgage insurance. Another advantage is that you can deduct second mortgage payments off of your taxes.
Many mortgage organizations introduced an option of their own, due to the large number of borrowers opting for piggyback loans. The solution of the mortgage organizations offered a lower monthly mortgage payment at a rate the same as or better than the piggyback loan had. The buyer was still required to go through a private mortgage insurance provider; however the new option allowed the buyer to pay a premium that was spread over the period of the loan repayment schedule.
Time must be taken to decide which way is best for you and your circumstance. There are some definite advantages to both approaches, but you shouldn’t decide on one or the other until you review all the information available.
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