Private Mortgage Insurance (PMI) is an extra cost that many homeowners pay to protect a lender if the borrower defaults on their loan. It’s usually required if you don’t have at least 20% equity in your home. PMI can add hundreds of dollars to your monthly mortgage payments, so it’s important to work towards avoiding it. Here are some tips on how you can avoid paying PMI:
1. Make a larger down payment – The easiest way to avoid paying PMI is to put down at least 20% when you buy your home. This will satisfy the lender’s requirements and you won’t have to pay any PMI. For example, let’s say you’re buying a $200,000 home and putting down 10%. Your loan amount would be $180,000 and you’d have to pay PMI of about $100 per month. If you increased your down payment to 20%, the loan amount would drop to $160,000 and no PMI would be required. That would save you $100 per month!
2. Get a Piggyback loan – A piggyback loan combines two loans into one transaction – usually an 80% primary mortgage and a second loan for 10-20% of the purchase price. With this option, no PMI is required because the second loan takes up the difference between the first loan and 20%. For example, if you were buying a $200,000 home with a 10% down payment ($20,000), then an 80/10/10 piggyback loan could be used instead of having to pay for PMI. This would give you an 80% mortgage for $160,000 ($200K minus the $20K down payment) plus two smaller loans – one for 10% ($20K) and one for 10% ($20K). Together they make up the full purchase price with no need for PMI.
3. Get Lender Paid Private Mortgage Insurance (LPMI) – LPMI is similar to regular PMI in that it provides protection for lenders if borrowers default on their loans but with LPMI, the lender pays for it instead of the borrower. The benefit here is that because it’s being paid by the lender, they may offer lower rates or other incentives such as reduced closing costs or flexible terms in exchange for taking out LPMI instead of regular PMI.
4. Refinance your existing mortgage – If your current mortgage was taken out before June 3rd 2013 then it’s likely that it requires PMI even if you’ve built up more than 20% equity since then because there are no rules that require lenders to cancel or reduce the amount of PMI when equity reaches certain levels after closing.. However, if rates have dropped since taking out your original mortgage then refinancing may allow you to get rid of your existing higher rate mortgage along with its associated PMI payments at the same time.. By refinancing into a new lower rate mortgage with less than 20% equity in your home (80% Loan To Value – LTV), then again Lender Paid Mortgage Insurance (LPMI) may be available as an option so that there’s no need for regular private mortgage insurance at all..
5. Build Equity Quickly – Even if none of these options are available or attractive at this point in time then another way around paying pmi could be to build up equity more quickly by making additional principal payments each month on top of what’s already due.. Doing this over time will enable you reach that magic 20% level much faster than just waiting around hoping rates drop so that refinancing becomes an option.. As long as your principal payments exceed what’s due each month then there’s no need to worry about prepayment penalties either – just make sure this is something allowed by your particular lender before signing up though..
Avoiding Private Mortgage Insurance can save homeowners hundreds or even thousands of dollars per year in extra costs and while sometimes this may not be possible right away due diligence now could very well mean saving money later on down the line by either building up enough equity through additional payments or utilizing one of these strategies when conditions become favorable enough.. So take some time now and review all possible options so that when rates do drop again or when cash availability allows it – whether through savings or other sources – taking steps sooner rather than later towards avoiding pmi could end up being well worth it!