DO I HAVE TO PAY MORTGAGE INSURANCE?

    The purchase of a new home can be overwhelming. New home buyers are bombarded with an array of terminology, e.g. interest rates, points, PITI, PMI and the list goes on and on. This article will focus on one bother-some term, "PMI" which stand for private mortgage insurance. This is the insurance premium charged to home buyers who put down less than 20% on their purchase.

   The PMI is collected monthly by the lender. Private Mortgage Companies offer this insurance to lenders due to the increased possibility of default attributed to less than 20% equity in the home. This premium is not tax deductible and the borrower receives no benefit - it is, however, mandatory.
   A creative way has been developed to avoid paying PMI, and in turn, provide a significant benefit to the borrower who cannot or prefers not to put down 20% of the sale price for the property. It is called "80/10/10". The borrower would still use 10% of his/her own personal funds as a down payment, while an additional 10% would be provided by the lender in the form of a home equity line of credit.

   The borrower fulfills the 20% down payment needed to avoid private mortgage insurance when the home equity loan is used to pay the remaining 10%. The benefit: Not only is the overall payment less, but the interest paid on the home equity line of credit is tax-deductible.

Here is an Example:

PURCHASE
PRICE

DOWN
PAYMENT
(10%)

PMI
INSURANCE*
(Monthly)

TOTAL
PAYMENT**
assuming 6%
200,000
20,000
78.00
1,157.00
250,000
25,000
97.50
1,446.50
300,000
30,000
117.00
1,736.00
* Non Tax-Deductible
** Assuming a 30 year Fixed Rate Mortgage not taking into account Taxes and Insurance
Using "80/10/10":

PURCHASE
PRICE

DOWN
PAYMENT
(10%)

HOME
EQUITY
(10%)
assuming 6%

TOTAL
PAYMENT**
assuming 6%
200,000
20,000
100.00
1,059.00
250,000
25,000
125.00
1,324.50
300,000
30,000
150.00
1,589.00

* Tax-Deductible Interest Only Payment
** Assuming a 30 year Fixed Rate Mortgage not taking into account Taxes and Insurance

There are variations to the "80/10/10" such as the "80/15/5" where the borrower has 5% of his or her own funds to put down. Here, the lender would provide 15% in the form of a home equity line of credit. Whatever the case may be, homebuyers need to be aware of these creative techniques to avoid "penalties" such as "PMI". If your lender quotes Private Mortgage Insurance, borrowers should not be afraid to ask about "80/10/10"!!

Biagio Maffettone - Home Loan Consultant
Countrywide Home Loans
Phone: (914) 455-2741
www.countrywide.com
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