Private Mortgage Insurance can add hundreds of dollars to your monthly mortgage payment. So, how can you avoid paying for it at all? Before we discuss tips on ridding yourself from this financial burden, let’s review what Private Mortgage Insurance (PMI) is, and why so many lenders require it on their loans.
PMI is a type of insurance that is paid for by the borrower, even though it offers no real benefits to them. Private Mortgage Insurance is a type of safety net for the lender, to help defray the costs should a borrower default on their loan. In some cases it pays off the entire loan when a default occurs; and sometimes it only pays for the portion of the loan that is not recovered after a foreclosure sale. It is important to realize, however, that even if the lender recoups their investment through PMI after a default, it does not relieve the borrower of their responsibility to pay the loan themselves.
In most cases PMI is required when a borrower is unable to put down 20% on the purchase price of the home or does not have at least 20% equity in the property.
Since the PMI equals as much as 1% of the loan, it can hundreds of dollars each month depending on the price of your home and the amount of your mortgage.
Now that you better understand what PMI is and why it is automatically included in your mortgage payment, lets look at some ways to avoid it altogether.
Make a 20% Down Payment When You Purchase Your Home
Putting down at least 20% on your home at the time of purchase will ensure that can freely deny any PMI on your loan. Borrow from your 401 K or IRA and consider receiving a gift from a relative.
Get a New Appraisal After Closing
While you may have to start out with private mortgage insurance to get your loan, nothing can stop you from canceling it once you can prove that you have 20% equity in your home. Watch property values carefully in your neighborhood and as soon as you suspect that your property is worth enough to cover that 20% equity get a new appraisals done and fill out the forms for PMI cancellation. In some cases, the private mortgage insurer may require a waiting period of one year before PMI can be cancelled. Also, you may have to use an appraiser approved by the PMI provider.
Use a Piggy Back Loan; second mortgage
To avoid PMI, you can take out an 80% loan for the bulk of the purchase price and a second mortgage for the difference between your down payment and the 20% equity requirement to avoid PMI. At Montgomery Mortgage, we specialize in providing second mortgages to avoid PMI. The second mortgage rate is usually lower than the cost of PMI.
If you are a Veteran, it is likely you qualify for a VA Loan. The VA is the best source for a No PMI Mortgage. PMI may be avoided on an FHA loan if the repayment term is less than 15 years.
While most people consider Private Mortgage Insurance to be a waste of their money since it offers them no real benefits, the vast majority of lenders do require it to be added to the mortgage amount unless the borrower uses the tips above to secure a PMI-less loan.