How To Avoid Paying Private Mortgage Insurance - Ratinah

How To Avoid Paying Private Mortgage Insurance - Ideally, traditional mortgage lenders want new homebuyers to have a 20% down payment when buying a new home. So, if you buy a house for $200,000, you should be prepared to have $40,000 as a down payment.

How To Avoid Paying Private Mortgage Insurance - Ratinah

Unfortunately, many people don't have this kind of money. To this end, private mortgage insurance (PMI) was created as a way for mortgage companies to get their money back if the homeowner defaulted on the loan. There are various loans available to help people with a down payment. In some cases, homeowners can get 100% financing, and avoid PMI

What is Personal Mortgage Insurance?

As Americans make less money, and house prices continue to rise, the majority of the population cannot keep the recommended 20% down payment. To make home ownership possible, mortgage companies created certain mortgage insurance, (PMI), for people who own less than 20% of homes. This insurance protects the lender if you default on the mortgage.

How to Avoid Paying for Personal Mortgage Insurance

On average, PMI can increase your mortgage payment by $100 – sometimes less, sometimes more. However, there are ways to avoid paying for this additional insurance. Which obviously involves having at least 20% as a down payment. If this is not an option, the homeowner can agree to a higher interest rate. Other tactics require approval for 100% financing.

How Does 100% Mortgage Financing Work?

100% mortgage financing makes it possible to buy a house without a down payment. Also referred to as piggyback loans or 80/20 mortgage loans, 100% mortgage financing involves obtaining a first mortgage for 80% of the cost of the home, and a second mortgage, or home equity loan, for 20% of the cost of the home. Together, the first and second mortgages allow for the purchase of a home without a down payment, and without personal mortgage insurance.

What to Avoid Paying for Private Mortgage Insurance — PMI?

One way to purchase a home; In mortgage terms, the loan-to-value (LTV) ratio of a mortgage is 80%. If your new home costs $180,000, for example, you'll need to spend at least $36,000 to avoid paying PMI. While that's the easiest way to avoid PMI, such a big down payment may not be possible.

In addition, if the value of your home rises to an amount that lowers your LTV below 80%, some banks will allow you to submit a request to cancel the PMI. However, in this scenario it is likely that the bank will require a professional appraiser to accompany the request, at the expense of the borrower.

Another option for qualified borrowers is a piggyback mortgage. In this situation, a second mortgage or home equity loan is taken out at the same time as the first mortgage. With an “8-10-10” piggyback mortgage, for example, 80% of the purchase price is covered by the first mortgage, 10% is covered by the second loan, and the final 10% is covered by your down payment. This lowers the loan-to-value (LTV) of the first mortgage to below 80%, eliminating the need for a PMI. For example, if your new home costs $180,000, your first mortgage is $144,000, your second mortgage is $18,000, and your down payment is $18,000.

The final option is lender-paid mortgage insurance (LMPI) where the PMI fee is included in the mortgage interest rate over the life of the loan. Therefore, you may end up paying more interest over the life of the loan.

Important point

  • Private mortgage insurance (PMI) is issued if you need to finance more than 80% of the purchase price of the home.
  • You can avoid PMI by taking out your first and second mortgage at the same time so that no loan exceeds 80% of the cost.
  • You can opt for lender-paid mortgage insurance (LMPI), although this will often increase your mortgage interest rate.
  • You can request the cancellation of PMI payments once you have built at least a 20% equity stake in the home.

Ending PMI Early

After you've had a mortgage for a few years, you may be able to eliminate PMI by refinancing — that is, replacing your current loan with a new one — although you'll need to weigh the costs of refinancing against the costs of continuing to pay mortgage insurance premiums. You may also be able to dispose of it early by prepaying the principal of your mortgage so that you have at least 20% equity (ownership) in your home. Once you have the amount of equity built up, you can ask the lender to cancel your PMI.

Assuming you stay on track with your mortgage payments, the PMI will eventually expire in most cases. After a mortgage's LTV ratio drops to 78%—which means your down payment, plus the principal you've paid off, equals 22% of the home purchase price—the federal Homeowners Protection Act requires lenders to automatically cancel insurance.

Insight Advisor

Scott Gaynor, CFP®, AIF® KCS Wealth Advisory, LLC, Los Angeles, CA

There are several ways to avoid PMI:

  • Get 20% off your home purchase
  • Lender-paid mortgage insurance (LPMI)
  • VA Loans (for eligible military veterans)
  • Some credit unions may waive PMI for eligible applicants
  • Piggyback mortgage
  • Doctor loan
  • There are a few things to note about the options above.

With LPMI, the lender pays the PMI fee, but will most likely give you a higher mortgage rate. In addition, LPMI is not eliminated as in the end PMI.

With a piggyback mortgage, the buyer can use two loans instead of one (piggyback) to buy a home. The first is a traditional mortgage loan. The second includes a standard home equity line of credit or home equity loan. The second loan covers the remaining amount for a 20% down payment and usually has a higher rate.

That's How To Avoid Paying Private Mortgage Insurance - Ratinah


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