Strategies for Avoiding Private Mortgage Insurance (PMI) Payments
Learn effective strategies to avoid or minimize private mortgage insurance (PMI) payments when purchasing a home.
Private Mortgage Insurance (PMI) is typically required by lenders when homebuyers make a down payment of less than 20% of the home's purchase price. PMI protects the lender in case the borrower defaults on the loan. While PMI can add to the cost of homeownership, there are strategies to avoid or eliminate PMI payments:
Make a Larger Down Payment:
- The most straightforward way to avoid PMI is to make a down payment of at least 20% of the home's purchase price. This eliminates the need for PMI entirely.
Piggyback Loan (80-10-10 or 80-15-5):
- In situations where you can't make a 20% down payment, you can consider a piggyback loan. This involves taking out a second mortgage to cover a portion of the down payment. For example, an 80-10-10 loan means you put down 10%, take a mortgage for 80%, and another for 10%. This allows you to avoid PMI.
Lender-Paid Mortgage Insurance (LPMI):
- With LPMI, the lender pays the PMI premiums on your behalf in exchange for a slightly higher interest rate on your loan. This can be a good option if you have a strong credit score and plan to stay in the home for a while.
Single Premium PMI:
- Some lenders allow you to pay the PMI premium upfront in a lump sum at the time of closing. While this requires a significant upfront payment, it eliminates ongoing PMI premiums.
Seek a Doctor Loan or VA Loan:
- Certain loan programs, like doctor loans for medical professionals and VA loans for veterans, do not require PMI, even with lower down payments.
Rapidly Pay Down Your Mortgage:
- Once you reach 20% equity in your home through regular mortgage payments and appreciation, contact your lender to request the removal of PMI.
Home Value Appreciation:
- If your home's value increases due to market conditions or improvements, your loan-to-value ratio may improve, allowing you to request PMI removal.
Refinance to Remove PMI:
- If your home has appreciated significantly or you've paid down your loan balance to the point where your loan-to-value ratio is below 80%, you can refinance your mortgage to remove PMI.
Monitor Automatic Termination:
- The Homeowners Protection Act (HPA) requires lenders to automatically cancel PMI when your loan balance reaches 78% of the original home value. Be sure to keep track of your loan balance to ensure timely removal.
- Understand your specific lender's PMI policies and requirements. Stay informed about your loan balance, home value, and the equity you have in your property to take appropriate action.
Keep in mind that PMI removal may be subject to specific lender guidelines and your loan's payment history. Review your mortgage contract and speak with your lender to understand the exact requirements for removing PMI. Avoiding PMI can save you money over the life of your mortgage, so it's worth exploring these strategies to reduce or eliminate this cost.
How to Avoid Paying Private Mortgage Insurance (PMI).
There are a few ways to avoid paying private mortgage insurance (PMI):
- Make a down payment of 20% or more. PMI is typically required when you borrow more than 80% of the purchase price of a home. If you can make a down payment of 20% or more, you will avoid having to pay PMI altogether.
- Get a piggyback loan. A piggyback loan is a second mortgage that you can use to make up the difference between your down payment and 20%. This can be a good option if you don't have enough money saved for a 20% down payment.
- Ask your lender about PMI cancellation options. Some lenders offer PMI cancellation options that allow you to cancel PMI once you have reached a certain equity level in your home. For example, some lenders may allow you to cancel PMI once you have 20% equity in your home.
- Refinance your mortgage. If you have been making your mortgage payments on time and your home value has increased, you may be able to refinance your mortgage to a lower interest rate and/or a shorter term. This can help you to build equity in your home more quickly and reach the point where you can cancel PMI sooner.
Here are some additional tips for avoiding PMI:
- Consider buying a less expensive home. If you can afford to buy a less expensive home, you will need to borrow less money and may be able to avoid paying PMI.
- Get pre-approved for a mortgage before you start shopping for a home. This will give you a good idea of how much money you can borrow and what your monthly payments will be.
- Shop around for the best mortgage deal. Compare rates and terms from different lenders to get the best deal possible.
If you are unsure whether or not you will need to pay PMI, you should talk to a mortgage lender. They can help you to understand your options and choose the right mortgage for your needs.