With rental costs rising across America, home ownership is becoming more appealing. Whether you rent or make mortgage payments, you’ll have a monthly housing expense either way—why wouldn’t you want to put that money towards something you own instead of someone else?
Of course, the first hurdle in buying a home is the down payment. Most loan programs will require a minimum down payment of 20 percent of the loan or a monthly PMI payment.
What Is PMI?
PMI (Private Mortgage Insurance) is insurance coverage that protects the lender if a borrower defaults on a home loan. PMI requires a monthly payment on top of your mortgage payment, making it larger than it would have otherwise been.
PMI isn’t necessarily bad; it allows you to afford a home much sooner than you would have been able to with a 20 percent down payment. However, PMI adds to your monthly mortgage payment, leading many homeowners to wonder how to avoid it.
How Much Does PMI Cost?
PMI rates vary by credit score and other factors, but they typically range from 0.58 percent to 1.86 percent of the original loan amount.
For example, a $230,000 loan with $15,000 down and a credit score of 680 to 699 might have a PMI of around 1.21 percent, or $217 a month, on top of the standard mortgage payment.
How to Avoid PMI Without Paying 20% Down
Avoiding PMI without paying 20 percent down can make a significant difference in the overall lifetime cost of a mortgage loan and the size of your monthly payments. There are a few ways a borrower can avoid PMI without making a large down payment.
Find Lender-Paid Mortgage Insurance (LPMI)
Lenders will sometimes advertise “No PMI home loans.” In these cases, the lender will pay for the PMI themselves but charge a higher interest rate on the mortgage to cover their expense. While homeowners still must fork over the cost of a higher interest rate with LPMI, your mortgage payment each month might be cheaper than if you paid a monthly insurance premium.
It’s best to carefully compare the costs and benefits of a no-PMI mortgage program. While it is sometimes cheaper than paying the PMI, sometimes it isn’t, depending on the loan terms.
Get a Piggyback Mortgage
A piggyback mortgage lets you buy a home with two loans. The first loan covers 80 percent of the home price, the second loan covers 10 to 15 percent, and your down payment covers the remaining amount.
Piggyback loans can be harder to find nowadays. If you can secure a second mortgage, this loan typically has a higher interest rate than the first mortgage.
Alternatively, you can still avoid PMI if you fulfill the 20 percent down payment with a loan from another source, such as a family member. Remember, however, that your pre-approval for a home loan often depends on not taking out new loans or credit cards.
See If You Qualify for a VA Loan
Did you or your spouse serve in the military? VA loans are loans backed by the Department of Veteran Affairs. They are for active or veteran service members and their spouses.
Because these loans are backed, they do not require mortgage insurance, though there is a one-time funding fee. VA loans are a great way to get a home without PMI or paying 20 percent down.
Secure a Loan that Doesn’t Require PMI
Occasionally lenders and banks create special programs that allow a low down payment with no PMI. There are sometimes additional perks for first-time home buyers, low-income home buyers, and certain professionals like teachers or doctors.
How to Get Rid of PMI on a House I’ve Already Purchased
PMI is no longer required once a mortgage’s loan-to-value, or LTV (loan divided by value), has reached 80 percent. This can happen in one of two ways; a homeowner pays down the loan so that the loan’s value is 80 percent of what the home is worth, or the home appreciates, becoming greater in value than the loan amount.
Once the home loan’s LTV value reaches 80 percent, PMI is usually no longer required and can be requested to be removed from the monthly mortgage payment. Once a mortgage drops to 78 percent, the federal Homeowners Protection Act requires the lender to cancel PMI automatically.
Get Your New Home With First Fidelis
First Fidelis wants to help you reach your goal of being a homeowner. Our wide range of loan programs allows us to find the right mortgage for you. Our speedy loan process can help you close your new loan within 30 days! Fill out our pre-approval application to get started, or contact us to learn more.