Private mortgage insurance (PMI) protects lenders against risk of default on loans to homebuyers. Reducing risk to lenders can mean lower interest rates and better access to credit for borrowers, but it can also add significantly to the cost of a mortgage. Here’s how to borrow money to buy a home while avoiding PMI or at least easing some of that burden. Consider using SmartAsset’s free financial advisor tool to find advisors who serve your area today.
BPMI helps home mortgage lenders avoid financial loss if a borrower fails to make the required loan payments. PMI is usually required on any loan with less than a 20% down payment, producing an 80% loan-to-value (LTV) ratio. Borrowers are motivated to come up with down payments at least that large, because PMI is costly.
The precise cost of PMI varies from lender to lender, and also depends on the loan type and amount and the borrower’s credit as well as the loan-to-value (LTV) ratio. However, it can be as much as 1% of the loan value annually. On a $400,000 loan, that comes to $4,000 a year or $333 monthly added to the principal, interest, taxes and hazard insurance.
How to Stop Paying PMI
If you simply wait long enough, you can stop paying PMI. Once you have paid enough principal that the loan value is equal to 80% or less of the home’s value, you can ask your lender to drop the PMI charge. Not all will do that, but they have to once the LTV has reached 78% or you’ve reached the halfway point in the loan term.
To speed up the erosion of loan principal you could make extra principal payments. If your local market is healthy and home prices are apricating, that could help reduce the LTV to the point you can request ending PMI. You could also increase the home value by doing improvements, such as adding a new bathroom or remodeling a kitchen.
Refinancing is another way to get rid of PMI. If your lender won’t drop the monthly PMI requirement but your LTV is less than 80%, you can likely refinance the loan without PMI.
How to Completely Avoid PMI
The simplest way to avoid PMI is to make a down payment of at least 20% of the purchase price. With home sale prices averaging well over $400,000 nationally, however, this means a down payment of at least $80,000. One way to come up with this sum is to save up over time, but that’s not the only way. Other potential sources include gifts from family members and down payment assistance programs, which operate in nearly every market and target mostly lower-income first-time homebuyers.
There are also a number of loan programs that don’t require PMI. If you are a former member of the military, you can likely qualify for a zero-down loan backed by the Veterans Administration. VA loans don’t require monthly PMI premiums, but they do have some extra upfront fees compared to other loans.
Many lenders have special loan programs called physician loans that are offered to medical doctors and feature no down payment and no PMI. Dentists, veterinarians, nurse practitioners and other medical professionals also typically qualify for these. And some programs are open to other high-income professionals such as accountants and attorneys.
Even if you’re not one of these high-earning professionals, you may be able to get a no-PMI loan through a less restrictive loan program. No-PMI loans are offered by many credit unions, but banks and other lenders sometimes have them as well.
A piggyback loan provides a way to double the size of your down payment with the help of a second mortgage. These loans call for the buyer to put down at least 10%. Another loan for an additional 10% to bulk up the down payment to 20%. Then there is no PMI on the purchase loan for 80% of the value.
How to Pay Less PMI
In addition to these options for completely avoiding or ending PMI, there are ways to reduce the amount of PMI, or at least to pay it in a different way that might be preferable.
One way is to use lender-paid PMI. Most PMI is paid by the borrower, but sometimes the lender will pay the PMI premiums instead. The downside here is that the lender will increase the cost of the mortgage by raising the interest rate. Another downside is that you can’t cancel lender-paid PMI unless you refinance the loan.
Another option is single-premium PMI, which calls for the borrower to pay the premium for the insurance all at once, in a lump sum at closing. This reduces the total monthly mortgage payment, but it’s not refundable.
A loan backed by the Federal Housing Administration (FHA) lets you avoid PMI with only a 3.5% down payment. The catch here is that the FHA requires borrowers to pay a mortgage insurance premium at closing as well as monthly mortgage insurance premiums for at least the first 11 years of the loan. Depending on the situation, FHA mortgage insurance may cost more or less than PMI.
PMI premiums can add hundreds to a homebuyer’s monthly mortgage payment. And it’s hard to avoid it unless you have 20% down or just wait until, through a combination of payments on principal and home value appreciation, the loan balance comes to less than 80% of the home value. But there are some other options, including using down payment assistance, VA loans, piggyback loans and doctor loans. Not all lenders have programs that let borrowers avoid PMI, and some that do will have less attractive terms or higher costs. And PMI isn’t the only concern when borrowing for a home. Interest rates, fees, loan terms and other factors can be equally or more important.
Tips on Mortgages
- Before making a major decision such as taking out a home mortgage, consider discussing your situation with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free mortgage comparison tool to compare mortgage rates from top lenders and find the one that best suits your needs.
- Estimate your monthly mortgage payment with taxes, fees and insurance by using this no-cost mortgage calculator.
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