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Avoiding PMI
The easiest way to avoid PMI is to make a cash
down payment of 20% or more. Potential sources of additional
cash include:
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Borrowing against your 401(k) retirement plan
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Taking a margin loan against your stock
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Asking relatives for a gift
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Refinancing your car and taking cash out
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Selling your car, jewelry, etc.
In the event you are unable to make a 20% cash
down payment, consider these options:
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Piggy Back Loan:
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A piggy back loan usually allows you to avoid
PMI even though you are making a down payment of less than 20
percent. The most common piggy back loan combinations are:
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80-10-10: Eighty percent first loan, 10
percent second (piggy back) loan, 10 percent cash down
payment.
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80-15-5: Eighty percent first loan, 15
percent second loan, 5 percent cash down payment.
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80-20: Eighty percent first loan, 20
percent second loan, no cash down payment.
Even though the second loan rate may be higher than the first
loan rate, you usually come out ahead since you don't have to
pay PMI. Also, the interest on the second mortgage will likely
be fully tax-deductible.
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Lender Paid PMI (LPMI):
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In this case, the lender makes your PMI
payment for you, but charges you a higher rate on the loan.
Since the PMI payment is not tax deductible, and the higher
rate results in a higher, tax-deductible interest payment, in
the short-run you may save money by choosing LPMI over the
conventional PMI option. The disadvantage is you're stuck with
the higher interest rate for the life of the loan. If you had
paid PMI, you could cancel it when you achieved 20% equity in
your property.
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