Avoiding Paying PMI
Would you like to learn how to avoid PMI when getting a loan?
PMI is an abbreviation for private mortgage insurance. Not paying PMI is undoubtedly something to consider.
Private mortgage insurance (PMI) adds an extra cost to your monthly mortgage payment, something most buyers understandably want to avoid.
Fortunately, there are ways to avoid paying PMI, options you want to be aware of as you buy a home.
Understanding what PMI is, why it exists, and what you can do to avoid it is worthwhile if you want to save money on your home purchase.
Below, you will see a detailed explanation of how not to pay private mortgage insurance by using a few different financing methods, including the following:
- A piggyback mortgage loan.
- Lender-backed mortgage insurance or LPMI.
- Opting for another type of loan like a Veterans Mortgage. If you qualify.
- Using a credit union for getting a mortgage.
- Getting a jumbo loan.
What is Private Mortgage Insurance?
Private mortgage insurance, commonly known as PMI for short, is a type of insurance policy that homeowners are expected to purchase if the equity in their home is less than 20%.
Private mortgage insurance (PMI) is a method by which lenders are safeguarded against the potential for borrower default and an ensuing foreclosure.
When you have less than a 20 percent down payment, it is customary for lenders to require you to buy protection from a PMI company before giving you a loan.
Whether buying a home or refinancing, if you cannot maintain a 20% equity, such as bringing a large enough down payment, your lender will make your purchase and carry PMI until you reach 20% equity.
PMI is “private” insurance because you purchase it from a private company instead of a government organization where you may get your loan, like with FHA loans.
The 20 percent down payment is a requirement of both Fannie Mae and Freddie Mac, which back or purchase most mortgages here in the US.
The entities require 20 percent down payment funds to avoid paying private mortgage insurance.
Buyers who want to get a mortgage for more than 80 percent need to buy insurance to protect these agencies, or another party must provide it for them.
When you want to avoid PMI, it will be one of the critical questions to ask a mortgage lender.
Why Do You Have to Pay PMI?
Lenders are taking a risk when they hand over money to you for your home purchase. You could default on your loan and lose the home, leaving the lender holding on to a piece of real estate it does not want or need.
When a creditor winds up with a home, they will sell it at an auction to get back their money, but homes selling at auctions will often sell for less than they are worth.
Buyers at auctions expect homes to be in less-than-perfect shape and pay accordingly.
To cover the difference between what the lender gives you to purchase the home and the amount the house will sell for should you default, lenders require you to carry private mortgage insurance.
The 20% equity requirement to avoid PMI represents the financial position you need to be in for the lender to consider you unlikely to default.
Of course, many borrowers do not have the twenty percent to put down. For those buyers who don’t have the necessary funds, their first consideration is knowing how to stop paying private mortgage insurance.
Eliminating private mortgage insurance is brilliant because it is a useless fee that offers few benefits. Canceling PMI as soon as possible is smart!
The argument for PMI is that it allows buyers with less than a 20% down payment to purchase homes.
You can buy a home for a relatively small monthly fee for a lower down payment. You get your home, and the lender is protected.
It is all fine and dandy to be able to purchase the home you want. However, after you own the house, you will think, how do I cancel paying this fee?
How Much Will PMI Cost?
PMI is calculated based on the risk you present to the lender – just like every other insurance policy.
One of the primary variables is the size of your down payment. The less you pay down, the higher your PMI payment will be.
You will need to pay the fee monthly, so it will be necessary to calculate private mortgage insurance costs into your finances when determining how much home you can afford.
PMI can range from less than $100 a month to several hundred – or more, depending on the cost of the home and your down payment – so you want to be prepared.
Here is a private mortgage insurance calculator you can use to get a ballpark estimate of how much you will pay in PMI.
PMI costs generally range from 0.30% to 1.15% of your mortgage loan balance annually.
The PMI amount will be broken into twelve installments and paid with your monthly mortgage payment.
How to Avoid PMI
Now that you know what you are getting into, the question is, “What can I do to avoid paying PMI?”
Below, you will see the ways around paying private mortgage insurance.
Make a 20% Down Payment.
The simplest solution is to pay 20% or more down for your home. You may need to look for a more affordable property.
Possibly a smaller property or in a less desirable area. Another alternative is getting creative with your financing. For instance, obtaining an extra boost from family members to reach 20% would free you from PMI.
For example, a relative could give you a down payment gift.
If you are close but are quite there yet with saving for the 20 percent down payment, it may also make sense to put off purchasing a home for a little while.
The savings from not paying private mortgage insurance can be pretty substantial. That monthly savings could go towards your investment accounts, retirement savings, or other expenses.
Get a VA Loan If You Qualify, And There Will Be No PMI
Unfortunately, if you are like most buyers, hitting the 20% mark immediately will be hard, if not impossible.
Another option to avoid private mortgage insurance is to get a VA loan. You will need to meet the requirements, the most fundamental of which is previous military service, but if you can get the VA loan, you will avoid PMI.
The article referenced above will provide a complete guide to veteran loans.
Get LPMI or Lenders Paid Mortgage Insurance
The two options above are the easiest and most financially sound ways to avoid PMI, but many people cannot take advantage of either.
There are other ways to avoid PMI, but they must be looked at more carefully because they can cost more than they are worth if you are not careful.
Lender-Paid Mortgage Insurance (LPMI) is one option you might hear about from your lender.
Unlike private mortgage insurance, which is paid for by you, with LPMI, the lender is the one that covers the cost of the insurance.
To get LPMI, you must agree to a higher mortgage rate. Getting LPMI may raise your rate by .375 to 0.75%, so do the math before you decide.
Check out how to get the best mortgage interest rates so you do not end up with terms that could have been much better for you.
Piggyback Financing to Avoid Paying PMI
With a traditional mortgage, you get all the money to buy the home in a single loan.
With piggyback financing, you take out an additional mortgage to fill in the gap between your down payment and the 20% cutoff for avoiding PMI.
If you had a 10% down payment, you could get a loan for 80% of the purchase price and then another loan for 10%.
But keep in mind that piggyback financing is less common for a reason. It will be more complicated and could cost you more in the long run. You may be better off just paying the PMI.
Example of Piggy Back Financing to Avoiding Paying PMI
With an “80-10-10” piggyback mortgage, for example, 80% of the purchase price is covered by the first mortgage, the second loan covers 10%, and your down payment covers the final 10%.
This lowers the loan-to-value (LTV) of the first mortgage to under 80%, eliminating the need for PMI.
For example, if your new home costs $400,000, your first mortgage would be $320,000, the second mortgage would be $40,000, and your down payment would be $40,000.
Use a Credit Union to Avoid PMI
Some borrowers use credit unions instead of traditional banks or lending institutions to avoid paying private mortgage insurance.
Credit Unions often hold their loans “in-house,” avoiding selling them on the secondary market. Fannie or Freddie may not be involved in the loan using a credit union.
Other first-time home buyer programs might also be offered that don’t require PMI. Check with mortgage lenders to find out.
Research Bank of America and CitiMortgage Programs
Bank of America and CitiMortgage have programs allowing borrowers to purchase a home with 3 percent down and no PMI!
Yes, you read that correctly; these are no PMI mortgage programs.
Who knows how long these programs will last? Programs like these come and go all the time.
Bank of America has a program called Affordable Loan Solution. To utilize this loan, you must go through homeownership counseling through one of their counselors.
CitiMortgage offers their HomeRun Mortgage program that also requires homeownership education. These programs are worth considering when you don’t want to pay PMI.
Jumbo Mortgage Lenders Can Help Avoid Paying PMI
It is possible to avoid paying PMI if you are getting a jumbo loan with some lenders. Generally speaking, a jumbo loan is more considerable, currently over $726,200.
There are a couple of places where the jumbo mortgage limit is higher, including Hawaii and Alaska. In these federally designated high-cost markets, the limit increases to $1,089,300.
Some jumbo lenders may allow a 90% loan-to-value ratio and let borrowers skip paying the private mortgage insurance.
Since Jumbo lenders are not selling their loans to one of the government agencies, they do not require PMI. Don’t expect every jumbo lender to do this.
Buy a Cheaper Home to Avoid Paying PMI
You might consider buying a slightly less expensive home if you have close to a 20 percent down payment. By spending less, you will have the down payment needed.
Just because you have mortgage preapproval for a more significant amount doesn’t mean you need to spend that much.
You may also consider saving more money to get the type of property you desire. Becoming a homeowner may take a little longer, but it may be worth it in the long run.
Check With Your Lender Once You Reach 20%
If you have no choice but to purchase a home with private mortgage insurance, remember that you only have to pay for the extra coverage until you reach 20% equity.
The insurance is supposed to drop automatically once you hit the mark but keep track to make sure.
When you reach 20%, contact your lender to verify that the insurance has been dropped. Banks are required to settle the PMI once you hit 22 percent equity in your home.
Hopefully, you now better understand how not to pay private mortgage insurance when buying a home.
Final Thoughts on How to Avoid Mortgage Insurance
While paying PMI is not pleasurable financially, it helps buyers become homeowners. As soon as you have enough equity in your home, you can avoid paying private mortgage insurance.
You’ll need to stay on top of the local real estate market to ensure you know when to call your lender.
Other Helpful Mortgage and Financing Articles
- How do mortgage overlays work – have you heard about them and wondered how they work? See what you need to know.
- How to get a mortgage – see a step-by-step home loan process from start to finish. Understanding how to get a mortgage is essential for every first-time home buyer.
Use these additional resources to make smart financial decisions when buying a home!
About the Author: The above Real Estate information on how to avoid PMI was provided by Bill Gassett, a Nationally recognized leader in his field. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 37+ years.
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