PMI Insurance

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A special type of insurance on a mortgage, not the house or the property, which is required for loans that are considered high risk for lenders (a risk in this instance is when a borrower's downpayment is less than 20% of the purchase price)

sometimes mandatory for customers to obtain a loan

ensures at least a portion of the lenders losses will be offset in the event the customer does not make payments on the loan as promised (defaults)

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Ways to avoid PMI

In today's market, there are some new ways to avoid mortgage insurance even when you don't have the standard 20 percent down payment.

Pay more interest: Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from .75 percent to 1 percent, depending on the down payment. The advantage is that mortgage interest is tax deductible.

Using an "80-10-10" loan: This program involves two loans and a 10 percent down payment. The 90 percent loan is financed with a first mortgage equal to 80 percent of the sale price, and a second mortgage for the remaining 10 percent of the sale price. The second mortgage has a higher interest rate but since it applies to only 10 percent of the total loan, the monthly payments on the two mortgages are still lower than paying one mortgage with mortgage insurance. Plus, again, there is the advantage of mortgage interest being tax deductible.