Mortgage insurance can be a significant additional expense for homeowners in the United States, especially for those who make a down payment of less than 20%. Thankfully, there are several strategies to avoid paying mortgage insurance while still securing a home loan. Here is a guide on how to navigate this financial burden.
The most straightforward way to avoid mortgage insurance is by making a down payment of at least 20% of the home’s purchase price. This not only eliminates the need for mortgage insurance but also shows lenders that you are financially stable, potentially allowing you to secure better interest rates.
Some lenders offer a product known as lender-paid mortgage insurance (LPMI). In this scenario, the lender pays the mortgage insurance upfront or adds the cost to your interest rate. While this may result in a higher monthly payment, it allows you to avoid the separate mortgage insurance premium.
A piggyback loan involves taking out two mortgages simultaneously. The first mortgage covers 80% of the purchase price, while a second smaller mortgage (often called a second mortgage) covers 10-15%. This method allows you to make a smaller down payment without incurring mortgage insurance. However, keep in mind that this option may come with its own risks and costs.
Many government-backed loans, such as those offered by the Federal Housing Administration (FHA), Veterans Affairs (VA), and USDA, have specific programs or exceptions that may allow you to avoid mortgage insurance altogether. For example, VA loans for eligible veterans typically do not require mortgage insurance. Research the qualifications and benefits of these programs to see if you qualify.
Different lenders offer various loan products, with differing requirements for mortgage insurance. Take the time to compare mortgage options from several lenders to find one that does not require mortgage insurance based on the down payment you can afford. Utilizing a mortgage broker can also help you navigate different lenders and loan products.
If you initially purchase a home with less than 20% down and are required to pay mortgage insurance, consider refinancing when your home's value increases or your equity reaches 20%. Refinancing can eliminate the mortgage insurance requirement and potentially lower your interest rate, saving you money in the long run.
Keeping an eye on your home’s market value can be beneficial. If property values increase, you may reach the 20% equity threshold sooner than expected. Once you reach this point, request the removal of your mortgage insurance from your lender.
While mortgage insurance can be a hurdle for many homebuyers in the U.S., these strategies can help you avoid the extra cost. By planning ahead and researching your options, you can secure the home of your dreams without the burden of additional mortgage insurance fees.
