Are there ways to avoid PMI (private mortgage insurance)?
First, we should consider what mortgage insurance is. In the late 1980s, lenders would not make loans unless there was 20% down. Mortgage Insurance companies were created to offer additional protection to lenders in the case of default (foreclosure). That then encouraged lenders to make higher loan-to-value loans. It is only because of this insurance process that we have such a high percentage of home ownership in our country today! PMI makes buying a home more attainable for many people. PMI can be avoided by splitting the amount of money you need to borrow into two separate loans. As long as the first loan is 80% or below, the lender will not require private mortgage insurance. The second loan (2nd lien) is generally at a higher interest rate than the first, because since it is in subordinate position, the lender is taking more risk — hence, the higher rate. In addition to avoiding mortgage insurance, the interest on the second loan is tax deductible whereas PMI is not deductible. H
