How to Avoid Paying Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is one of those additional expenses most homeowners try to avoid, and they’re willing to take the extra steps to get out of paying it.
We get it. Most of us don’t like to pay for things we don’t think are necessary. To help with that, let’s go over how to avoid paying PMI.
What Is PMI?
The first thing you should know about PMI is that it’s not insurance for the borrower; it’s for the lender. PMI protects the lender against any losses that could occur if the borrower defaults on their loan. PMI is also done through a different company; it’s not associated with your lender.
Most prospective homebuyers wouldn’t even be able to buy a home without PMI, since most individuals don’t have the funds for a sizeable down payment.
PMI is calculated as a monthly expense in your mortgage statement. The amount varies with the size of your down payment and the state in which you reside.
Does PMI Go Away?
PMI can go away during the life of the loan.
Because of the Homeowners Protection Act of 1998, lenders are required to cancel PMI when the borrower reaches a 78% loan-to-value (LTV) ratio, based on the home’s purchase price or appraised value (whichever one is less). In other words, when you build up 22% equity in your home, your PMI goes away.
Additionally, under the same act, borrowers can request for their PMI to be removed when they reach 80% LTV of the home’s original value, but you will need to contact your lender in this case.
Remember to keep documentation, because your lender may require you to show them a history of timely payments.
Additionally, the 78% LTV is based on the borrower’s scheduled payments. So if you’ve made extra payments and get to 78% LTV before the scheduled time, your lender isn’t required to contact you. It’s important for you to be aware of the status of your own mortgage.
How to Avoid PMI Completely
Here are two ways to completely avoid paying PMI on your mortgage:
1. Make a Large Down Payment
The minimum down payment you should make to dodge PMI is 20% of your loan. And yes, that’s a considerable amount of money. For example, if you got a loan for $120,000, your down payment of 20% would be $24,000, and a lot of people don’t have that kind of cash.
Of course, you can always save up if you’re adamant about not paying PMI, but taking this route requires a lot of financial dedication (which, don’t get us wrong, is great) and you might have to settle for a lesser loan amount.
Notice that in the example, we used a loan amount of $120,000. But, according to Zillow, the median home value is $206,300. For a loan that size, you’d be looking at a $41,260 down payment.
2. Get a VA Loan
Did you serve in the military? If so, then great news!
VA loans do not require PMI at all, no matter what your LTV is. This is one of the many great benefits of a VA loan, but only veterans and current servicemembers are eligible.
Your Other Options
There are some other routes to consider if you want to avoid paying PMI. After all, making a down payment of 20% or more isn’t feasible for most prospective borrowers. So here are a couple of options.
Lender-Paid Mortgage Insurance (LPMI)
LPMI is, you guessed it, the lender paying the PMI instead of you. In this case, PMI will not be part of your mortgage statement, but will be built into the loan instead. Typically, the lender will add a higher rate to your loan (about 0.75% more).
Going the LPMI route can be cheaper than paying the PMI yourself, and the higher interest rate you would be paying is tax deductible. But it’s important to discuss these options with your lender.
One thing to note about LPMI is that it stays for the life of the loan, whereas PMI can go away when you build up enough equity.
Additionally, LPMI is only offered for conventional loans.
In the mortgage world, the term “piggyback loan” refers to the borrower taking on two loans, which can be used to avoid PMI.
In order to do a piggyback loan, the borrower typically needs a 10% down payment. With a 10% down payment, the lender will arrange a first mortgage for 80% of the value and a second loan for 10%. This is usually expressed as 80/10/10.
It’s important to know that you’ll be paying two mortgages each month—so it’s vital that you talk to your lender to weigh your options.
Is PMI Worth Avoiding?
Here’s something you should ask yourself: is PMI worth avoiding? According to The Mortgage Reports, you could be at a loss if you try to save up for that 20% down payment. Home prices are increasing about 6% a year, so you could be lagging behind as you try to save that money.
Additionally, interest rates are always fluctuating. For 2018, rates are predicted to rise after the record lows of the past few years. You could potentially end up getting locked into a higher rate when you’re ready to make that 20% down payment.
PMI will allow borrowers who can’t make that big down payment to take advantage of today’s prices and lower interest rates.
It’s important to weigh all your options and get multiple quotes from different lenders. This will allow you to make an educated decision. Avoiding PMI can save you money on a month-to-month basis, but paying for PMI can be beneficial too. Only you know what will work for you financially.
Here at Elevate Mortgage Group, we strive provide clients with options that help their specific mortgage needs. You can call us today at 888-935-3828.