Private Mortgage Insurance (PMI) can be an additional financial burden for many homeowners in the US. Luckily, there are several strategies to avoid this cost, which typically comes into play when your down payment is less than 20%. Here’s how you can circumvent PMI and save money on your home loan.
The most straightforward method to avoid PMI is to make a down payment of at least 20% of the home’s purchase price. This not only eliminates PMI but can also lower your monthly mortgage payments. It may require some initial savings or financial planning, but it pays off in the long run.
Some lenders offer an option called Lender-Paid Mortgage Insurance (LPMI). In this scenario, the lender pays the PMI on your behalf, but the cost is typically rolled into the interest rate of your loan. While this can simplify payments, it’s essential to compare the long-term costs with traditional PMI.
A piggyback loan, or second mortgage, is another strategy to avoid PMI. In this arrangement, you take out two loans, one for a significant portion of the home price and a second smaller loan to cover the remaining amount. A common structure is an 80/10/10 loan, where you borrow 80% of the home’s price via a primary mortgage, 10% through a second mortgage, and provide the remaining 10% as a down payment. This option allows you to avoid PMI while keeping your monthly payments manageable.
If you’re eligible, consider VA (Veterans Affairs) or USDA (United States Department of Agriculture) loans as they typically do not require PMI, regardless of your down payment size. VA loans are available to veterans and active-duty military, while USDA loans are designed for low to middle-income households in rural areas. Both options can save you significant costs over time.
Once you have purchased your home and if you want to get rid of PMI after your initial home purchase, keep an eye on your loan-to-value ratio (LTV). As you make your mortgage payments, the LTV decreases. When your LTV falls below 80%, you can request to cancel PMI. It is crucial to keep track of your home value and mortgage payments to ensure timely removal of PMI.
If you are currently paying PMI and your home’s value has increased, refinancing your mortgage could be a beneficial move. A refinance might lower your interest rates and, if you've built enough equity in your home, allow you to eliminate PMI altogether. This is especially worth considering if rates have decreased since you bought your home.
A Home Equity Line of Credit (HELOC) can provide another method to eliminate PMI. Once you have built sufficient equity in your home, you can take out a HELOC to pay off your first mortgage, essentially creating a new loan that may not require PMI. However, be sure to carefully assess interest rates and the associated costs of a HELOC.
Avoiding PMI can save you significant amounts of money throughout the life of your loan. By considering a larger down payment, exploring alternative loan options, and monitoring your mortgage equity, you can take proactive steps to eliminate this additional cost and set yourself up for a more secure financial future. Make informed decisions that best suit your financial situation, and consult a mortgage advisor if necessary to explore your options.
