Avoid PMI with a higher interest rate mortgage

Fannie and Freddie require PMI on all home loans they buy with LTVs greater than 80 percent (less than 20 percent down); however, lenders who do not sell into the secondary mortgage market can make low-down-payment loans without PMI. These portfolio lenders frequently use that advantage to create a competitive edge over Fannie/Freddie affiliated lenders. Here's the catch: The "no PMI" lenders typically price their loans as much as .5 percent higher than the Fannie/Freddie interest rate.

Does this pricing make for a good deal? Maybe. It depends on the amount you are otherwise required to pay for mortgage insurance. But other factors play a role. From a tax angle, the higher-interest, no-PMI loan probably proves advantageous. Although you may not be able to legally deduct PMI premiums, you can deduct all amounts you pay for interest.2 This next point tips toward PMI, under certain conditions (Secret #103), you can cancel your PMI; therefore, you shouldn't pay the PMI premium for the full term of your loan, though you will pay the higher interest rate until the date you pay off the loan (by property sale, refinance, or full payoff through amortization).

As with many loan decisions, someone must run the numbers for each specific PMI premium and the applicable tax law; next, compare the results to the interest rate alternative. Ask a trusted loan rep. You could save yourself several thousand dollars or more.

2Subject to the high-income, $1,000,000 loan tax rules.

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