Private Mortgage insurance or PMI is a type of insurance provided by a private mortgage insurance company to protect a lender in the event of default on a loan. This type of insurance is generally required when the borrower has less than 20% equity in a home, that is, the loan amount divided the property value is 80.01% or greater.

The borrower pays for mortgage insurance on a monthly basis in addition to the principal and interest payments that are made on a loan. The lender transfers these premium payments to the mortgage insurance company.

Yes. MI companies offer several options to the borrower at the time of closing. A monthly premium plan requires two monthly premiums be paid during the closing, with a set monthly premium due thereafter as part of the required mortgage payment. An annual plan requires one year of premiums paid at time of closing, with a lower monthly premium due thereafter.

It is generally recommended that the borrower choose the lower up front insurance premiums at the time of closing with a slightly higher per month premium due thereafter.

1. Purchase a home with a combination first and second mortgage. The first mortgage would be limited to 80% of the home’s appraised value. The second mortgage would provide for the difference between the home’s purchase price, less the 80% first mortgage, less the down payment available. In other words, if you have a 10% down payment available, your first loan would provide for the 80% mortgage with a second mortgage of 10%. This is commonly referred to as an 80-10-10 transaction.

2. Another way to avoid incurring MI payments is to find a lender that offers self-insured programs. This type of loan would have a higher interest rate in place of the private mortgage insurance premium. While mortgage insurance premium payments are not tax deductible, the interest associated with a self-insured mortgage would be fully tax deductible.