Re-thinking Private Mortgage Insurance

Over the past several years Private Mortgage Insurance (PMI) has gotten a bad name. There is a now a whole group of first time home buyers who think PMI is evil. That is because we mortgage pros have been placing everyone on these 80/20 deals. Don’t get me wrong, it makes a lot of sense to do an 80/20 loan instead of paying PMI. However, with the liquidity crisis spreading to second lien holders, obtaining a second loan instead of paying for PMI is no longer a slam dunk.

One of the main arguments for not using PMI was that it wasn’t tax deductible. This has now changed. At least for loans obtained in 2007 mortgage insurance will be tax deductible. Almost every company in the business I talk to says this deduction will almost certainly be extended. That I can’t say; but the argument for secondary financing is somewhat muted.

Also, many lenders offer lender paid mortgage insurance (LMPI) in exchange for a slightly higher interest rate. For a high loan to value (LTV) loan this can oftentimes make sense. The reason being that if you’re at 95% today it will be many years before you hit 80% and in that time you may move or re-finance the loan anyway. It then follows that paying a higher rate for LPMI makes sense. However, LPMI is not available to everyone, you must have good credit.

The mortgage market is in flux. The old rules of home financing are no long applicable. What made sense two months ago may no longer make sense. We are in a time where all options need to be on the table.

Hat/Tip to David Porter for his thoughtful comment on a recent post, which prompted me to write this.

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