Vision Credit Education, Inc.

Private mortgage insurance, known as PMI, is seen by lenders as a guarantee that can protect them should you default on your mortgage. However, this comes at a substantial cost to you, often adding $150 or more to your mortgage payment.

The worst part is that it does nothing for you, other than to give the lender an incentive to approve your mortgage. Your best best is to avoid PMI altogether.

Ways to Avoid Private Mortgage Insurance

If you are independently wealthy, then you can simply pay at least 20% down at closing to avoid PMI. For the rest of us, we need feasible options to get around this unnecessary expense.

Second Mortgage

If you have good credit, then you can likely gain approval for a second mortgage to help you meet the 20% down payment requirement for conventional mortgage approval. This second mortgage can come from a major bank, credit union or other mortgage company.

This is known as secondary financing. You can combine whatever cash you want to contribute with enough of a second mortgage loan so that you are able to stay at or below an 80% loan to value (LTV) ratio required for a conventional mortgage.

This method can help you qualify for a conventional mortgage. It will increase your monthly debt obligations, because you have to make payments on it in addition to your primary mortgage.

Think of this however as putting some money toward your principal rather than wasting it on PMI payments. You may also gain additional tax savings through interest deductions (consult qualified tax adviser).

Down Payment Assistance Programs

Many areas offer special programs to prospective home buyers that meet certain income restrictions. These are geared toward subsidizing the housing costs of lower to moderate income consumers.

This is not a welfare program, nor is it a Section 8 program. These programs are specifically for allowing working families to afford to buy homes when their salaries are lower than what it takes to buy a home in that area.

For example, many police officers, firefighters and teachers provide substantial public service in all areas, yet cannot afford to live in some areas with higher real estate costs. These programs can help working families get into their first home.

Many states have a housing finance agency created by their own state legislatures to help increase access to homeownership. In addition, several medium to large-size cities also have down payments assistance programs. Even the Federal Home Loan Banks provide assistance within their multi-state regions.

What this means is that you could receive low interest loans, similar to a second mortgage, but with much lower rates. The City of Raleigh provides a down payments assistance program that incurs 0% interest for the first 5 years, and just 4% fixed interest thereafter. Homeowners pay just $50 a month toward it! The USDA provides similar programs for rural areas.

Other loans may even be forgivable if you remain in the home for more than 10 years or so. These down payment assistance programs can even be layered so that a home buyer can use down payment assistance from multiple sources to reduce the costs of their primary mortgage.

Whatever you do, avoid paying PMI whenever possible. A housing counselor can help you understand how!