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LESSON 8: PRIVATE MORTGAGE INSURANCE
(continued from previous page)
A home buyer has
to keep paying PMI premiums until the principal balance is paid
down to a certain percentage of the home's original value. We'll
talk about that in Lesson
28. There are a couple of ways to avoid PMI. Each has its own
benefits and drawbacks. You can:
A) Pay more interest:
Some lenders will waive the mortgage insurance
requirement if the buyer accepts a higher interest rate on the mortgage
loan. The rate increase generally ranges from three-quarters of
a percentage point, or 75 basis
points, to a full percentage point, depending on the down payment.
Borrowers can benefit from this because mortgage interest is tax
deductible whereas PMI payments aren't. But they'll end up paying
more interest over the lives of their loans due to the higher rates.
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Mortgage
interest is tax deductible. |
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You
pay more interest over life of loan. |
B) Use an "80-10-10" loan:
This loan program involves getting two
loans. The borrower gets a first mortgage equal to 80 percent of
the sale price, a second mortgage for another 10 percent of the
price and puts the remaining 10 percent down at closing. The second
mortgage has a higher interest rate. But since it applies to only
10 percent of the total loan, the monthly payments on the two mortgages
can still be lower than the monthly payment on one mortgage with
PMI. Plus, interest on the second mortgage is tax deductible. See
Tips
If we compare the purchase of a $100,000
home under the "80-10-10" plan to a standard fixed
mortgage including PMI, we find that the former is $17.45 cheaper
each month. Here's how it works: Under the "80-10-10"
plan, the 10 percent down payment on a $100,000 house is $10,000.
The first mortgage is $80,000 at 7.50 percent, which comes to
a monthly payment of $559. The second mortgage for $10,000 has
a 9.50 percent interest rate, making a monthly payment of $84.
The total monthly payment for both two loans is $643. With a
$10,000 down payment, one mortgage of $90,000 at 7.50 percent
has a monthly payment of $629, plus PMI of $31.45, making a
total payment $660.45. |
"Save money on your
mortgage by asking your loan officer to suggest a second
mortgage if the original quote included PMI."
John Waymire, Houstonmortgage.com, Houston
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