If you’ve spent any time investigating mortgages, then you have probably encountered more than a few dark mutterings about private mortgage insurance (PMI). What exactly is PMI? Why are so many prospective borrowers eager to learn how to avoid PMI? Are there ways that you can sidestep this insurance? If you are working toward homeownership, understanding the answers to these questions can help you decide whether you should settle for paying PMI or begin honing your strategy for avoiding it.
As its name suggests, private mortgage insurance is a type of insurance for mortgages. PMI’s purpose is to protect the lender in the event that the borrower defaults on the home loan. It generally comes into play when a borrower has a down payment that is less than 20 percent of the chosen property’s total sales price. While a PMI policy is handled by the lender, the premium is paid by the borrower. Traditionally, it is tacked onto the regular mortgage payment, and it can raise that payment substantially.
Why Borrowers Hope to Avoid PMI
Why do savvy borrowers hope to avoid PMI? There are several smart reasons:
- PMI is an additional expense. Private mortgage insurance generally costs between 0.5 percent and 1 percent of the loan amount (source). While the percentage is small, it adds up. For a $200,000 mortgage, the PMI can amount to roughly $200 a month.
- PMI only benefits the lender. Your lender is the sole beneficiary of PMI. It offers no protections for you, and if the policy is paid out, you won’t see a dime. The funds will go directly to the institution that holds your loan.
- PMI may not be deductible. Those who sing the praises of homeownership often tout the fact that mortgage interest is tax-deductible. While it may be deductible in certain circumstances, you cannot always take it off your taxes.*
- PMI can be difficult to cancel. Typically, when a homeowner’s equity reaches 20 percent, they can discontinue the PMI policy (source). However, PMI doesn’t stop automatically. There are often several hoops to jump through before you can stop making payments.
- PMI may linger even after your equity tops 20 percent. In some cases, borrowers are required to pay for PMI for a set period of time regardless of their equity. Any borrower who accepts PMI will want to read the fine print carefully so that they fully understand their responsibilities.
How to Avoid PMI
Roughly half of all borrowers put down a down payment of five percent or less (source), so it’s no wonder that many people are interested in learning how to avoid PMI. Fortunately, there are several methods that can work.
Pay a 20 Percent Down Payment
PMI is typically required when a borrower brings a down payment of less than 20 percent to the table. That means waiting to purchase a home until you have amassed a down payment of at least 20 percent is an easy way to avoid PMI (source).
Shop for a Conventional Loan That Skips the PMI Requirement
While most conventional mortgages require PMI if the down payment dips below 20 percent, there are exceptions that allow you to put down a smaller down payment without requiring PMI (source). However, it is best to look carefully before you leap at these offers. They often come with higher rates that might erase any savings you would have earned by avoiding PMI.
Get a VA Loan
Because they are backed in part by the U.S. Department of Veterans Affairs, VA loans come with extremely favorable terms. As long as the property’s price tag doesn’t exceed its appraised value, there is no requirement for either a down payment or PMI with this type of loan.
Opt for Piggyback Financing
Sometimes, you can dodge PMI by opting for two loans instead of one. As TheMortgageReports.com explains, if you have a 10 percent down payment, you may be able to take out a mortgage for 80 percent of your new home’s purchase price and a second, smaller loan for the remaining 10 percent. While it means that you’ll be making two loan payments each month, this strategy does allow you to avoid PMI.
While it’s certainly understandable that many borrowers want to know how to avoid PMI, this type of insurance isn’t necessarily something that should be resisted at all costs. There are times when accepting PMI makes sense. It all depends on your unique situation. To discover your options and explore their financial impact, contact PrimeLending today if you live in the Kansas City area. Our committed team will help you navigate the home-hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. When you’re ready to get started, please give us a call at 844-701-5626.
*PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.