First time buyers – PMI – What is it and why do I need that?

Written by Posted On Thursday, 13 March 2014 05:38

The information below was summarized from several mortgage company sites that are on the Web.


PMI is an onerous insurance that the lenders themselves levy upon you to insure themselves against loss. Then they have the chutzpa to also provide you with the solution to this problem – just pay them more by borrowing more.  


My advice is that you consider very carefully if you can really afford the house that you’re trying top buy, if you can’t afford the 20% down payment that will avoid PMI. If you still like going ahead, please be careful not to get in so far over your heads that you become “house poor” (unable to afford anything else because all of your money is going into the house payment), or, worse yet, get into a situation where you have to default and ruin your credit rating for a very long time. Work with a financial advisor to determine what you can really afford and try to maintain the discipline necessary to stay within your means.


What is Private Mortgage Insurance (PMI)?


PMI is Private Mortgage Insurance that insures the lender against loss if the borrowers default on the mortgage loan. PMI is usually required when the borrower’s down payment or equity is less than 20% of the loan value. Not all lenders require PMI, although those that follow the Fannie Mae and Freddie Mac guidelines for loan approval do require PMI. There are still mortgage programs out there that will allow you to buy a house for as little as 3% down (even some zero down programs). Here’s a good read on what that low down payment on a mortgage might actually cost you.


Basically PMI is doing nothing for you, the buyer; it is there to protect the lender, in case you default on the loan in the early stages of paying it back. It does not go in any way towards paying back the loan; it is an add-on to the loan. The mortgage insurance is usually escrowed into your mortgage payment, and when a borrower reaches 20% equity, they no longer need mortgage insurance. PMI is the equivalent of FHA or VA insurance on government mortgage loans, which is called MIP or Mortgage Insurance Premiums.


How Can I avoid PMI?


The easiest way to avoid PMI is to invest a 20 percent down payment at the time of the loan. Lenders will not require PMI when the loan to value (LTV) is 80% or less. However, coming up with 20 percent down payment is very difficult for many borrowers. Another way to avoid PMI is to apply for subsidiary financing (home equity loan or line of credit) and close it at the same time as your first mortgage. These types of programs are referred to as 80/2080/10/10,80/15/5, etc., can give you the extra down payment money so that you avoid PMI, but remember that is this type of 100% financing that got many homebuyers into trouble and caused the housing bubble to burse in the early 2000’s. 


Another way to avoid PMI is to use a sub-prime or B-Credit lender. These loans will often have higher interest rates, but that higher interest is tax deductible and it may work out overall. If you plan to stay in the house for quite some time, then locking yourself into a higher rate may not make sense. Run the numbers with your accountant to see.


When can I remove PMI and how do I do it?


PMI payments can be dropped from your mortgage when your LTV falls below 80%. Most lenders will not automatically drop your PMI though; so it is the borrower's responsibility to contact the lender and pay for a real estate appraisal. If the appraisal shows that your loan has fallen below 80% LTV, then your PMI will be dropped. Note that the cost of an appraisal will be only about 2-3 months worth of PMI payments, so it is worth it.


Note: If your LTV has fallen below 80%, it may be beneficial to consider refinancing your home or getting a home equity loan/line for the equity. Lines of credit can be good emergency funds in case of sudden loss of income and should be applied for when the borrower is in a good financial situation and employment status. Many borrowers do not apply for lines of credit during this time and wish they would have when tough financial times come up. Banks/lenders will not lend you money if you do not have a job, but generally will not close one that's already been opened. 


How Much Is PMI? 


Premium prices vary. They are based on the size of the down payment, type of mortgage and amount of insurance coverage. Premiums typically are folded into your monthly mortgage payment. The range for a median priced home is $50 to $80 per month. You can pay the premium up front and finance it as part of your mortgage. Lender-paid policies also are available, but they result in a higher interest rate on the mortgage.


Is PMI tax Deductible? 


The answer is – well, maybe this year, but maybe not next year. PMI was made tax deductible as part of the Tax Relief and Health Care Act of 2006 and originally applied to private mortgage insurance policies issued in 2007. But because the housing market has been slow to recover, lawmakers have extended this tax break. It now is in effect for premiums paid through 2013. However, like with most other things the dysfunctional Congress that we currently have has been dithering about extending the tax deduction for PMI. For now, you can claim It on your 2013 tax return, but we’ll have to wait and see for 2014 and beyond. Here’s a good read on that topic. 


Bottom Line –


PMI is not about you, it’s about the mortgage company; it’s just that they charge you for it. There’s no way around it if you can’t put 20% down somehow; but it is something that you can get out from under, once you paid the mortgage down to below that 80 – 20 split between mortgage value and property value. Unfortunately, right now the rules for FHA loans are a bit different and you can’t get out from under the MIP for the life of the loan. Bummer! You’ll have to refinance to a convention loan once you get the loan to value ratio in the right place.


In a recent development, some lenders have introduced a new concept called Lender-Paid Mortgage Insurance, which does away with the separate PMI payment, because the lender itself pays for coverage. There are no free lunches, however, so the catch is that the lender gets a higher mortgage rate on the loan. Check with your lender to see if they even offer that yet and then figure out which way you may be better off. At least the higher mortgage rate seems save as a tax deduction going forward.


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Norm Werner

Norm Werner is a Realtor at the Milford office of Real Estate One serving the southeastern Michigan area of Oakland and Livingston Counties. Norm specializes in residential real estate. Norm lives and works in Milford Michigan and is married to Carolyn Werner. Norm and Carolyn live in a historic home just three blocks from downtown Milford, with their two dogs - Sadie and Skippy. Norm specializes in the historic homes of Milford and the surrounding area and is on the Board of Directors of the Milford Historical Society. Norm especially enjoys working with first time buyers and those at the other end of the real estate spectrum who are downsizing into their retirement home. 

In addition to his web site, Norm also owns and m,aintains web site, the web site. He is also the webmaster for and the web site and the MilfordCar web site, as well as his church web site - In addition to blogging about real eastate, Norm has a personal blog - - on which he shares inspirational messages and the occasions personal observation about life.

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