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Should I Pay PMI or the Higher Interest Rate
Should I pay PMI or go with the loan with a higher interest rate but no PMI? This is a choice many borrowers face when deciding on a loan. There are many pros and cons for each choice. Borrowers should talk to an experienced Mortgage Consultant or Financial Consultant to help with their decision.
Some lenders pay the mortgage insurance on loans over 80% by raising the rate by a small fraction. This allows the borrower to get one loan and not having an additional expense which is not deductible on one's taxes.
There are loans out there where PMI is not required and your interest rate will not be effected as well. For example, keeping your LTV (loan to value) below 80% will allow you to not pay PMI with any loan, where it may just be a lender that does not require it.
Why do lenders charge PMI if your loan is above 80% LTV? Studies have shown that most foreclosures happen before the borrower has 20% of the mortgage's principal paid off. So, loans with an LTV of 80% or higher pose a greater risk to the lender.
You may also choose to do a combo mortgage like an 80/20 to avoid PMI. A combo mortgage carries with it a higher rate
on the second mortgage. Even with a higher rate second the borrower often comes out ahead when compared to a traditional loan with PMI.
PMI is not tax deductible, but mortgage interest is. You will want to take that factor into consideration when making your choice.
Links to more helpful sites:
Broker Outpost | Buying down an interest rate | What is needed to start the loan process | Getting a Pre-Approval | Should I Pay PMI or the Higher Interest Rate
