Private Mortgage Insurance (PMI) protects lenders against loss due to foreclosure. Most lenders require PMI when the down payment is less than 20 percent. The PMI premiums are paid by the borrower and the policies are provided by private mortgage insurance companies. PMI can NOT be written off on your taxes.

PMI is NOT mortgage life insurance. PMI protects the lender against loss. Mortgage life insurance protects your home and family by paying all or a portion of your mortgage in the event of your death.

There are several ways to avoid PMI. The easiest way to avoid PMI is to make a cash down payment of 20% or more. Potential sources of additional cash include:

• Borrowing against your 401(k) retirement plan
• Taking a margin loan against your stock
• Asking relatives for a gift
• Refinancing your car and taking cash out
• Selling your car, jewelry, etc.

In the event you are unable to make a 20% cash down payment, consider this option:

Piggy Back Loan: 

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:

• 80-10-10:  Eighty percent first loan, 10 percent second (piggy back) loan, 10 percent cash down payment.
• 80-15-5:  Eighty percent first loan, 15 percent second loan, 5 percent cash down payment.
• 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.