- Avoid PMI Without 20% Down | Guide 2021
- New Low Down Payment Home Loan Only for Certain Buyers
- Mortgage Insurance Requirement Waived
- Other low down payment options available
- The HomeReady Mortgage
- Conventional 97 Mortgage
- USDA Loans
- VA Loans
- Today’s rates
- How to Avoid PMI: Alternatives to Mortgage Insurance
- Types of Mortgage Insurance
- How to Avoid PMI
- Alternatives to PMI
- How to Cancel PMI
- Questions about mortgages? Find a local lender on Zillow who can help
- What Is Private Mortgage Insurance (PMI)?
- How Does PMI Work?
- How Much Does PMI Cost?
- How to Get Rid of PMI
- 1. Pay Extra on Your Mortgage Every Month
- 2. Get a New Home Appraisal
- How to Avoid PMI Altogether
- Do I Need Mortgage Insurance?
- What is mortgage insurance?
- Do conventional loans require mortgage insurance?
- What if I have an FHA loan, not a conventional loan?
- VA loans have fees?
- How can I get paying mortgage insurance?
- What happens to my PMI if I refinance?
- PMI: What Private Mortgage Insurance Is And How To Avoid It
- What is PMI?
- How much does PMI cost?
- Do all lenders require PMI?
- Is there any advantage to paying PMI?
- How do I avoid private mortgage insurance?
- Bottom line
- Learn more:
Avoid PMI Without 20% Down | Guide 2021
A new loan program requires just 3 percent down and no mortgage insurance.
The “Affordable Loan Solution” mortgage is a new conventional loan program from Bank of America intended to be a less expensive option than the popular FHA-backed mortgage.
Low- to no-downpayment loans are popular among home buyers. Mortgage rates are incredibly low, and rental payments are expected to increase significantly in the future.
However, new homebuyers are finding it difficult to come up with 20% of the home value upfront. Fortunately, borrowers don’t need to put 20% down. In some cases, they will only need to put 3 percent down, and potentially, home buyers may not need to make a downpayment at all.
With today’s low mortgage rates, lenders are rolling out programs that make it easier for a home buyer to get accepted for a low downpayment loan. The new 3% down loan is just one of many low downpayment loans available to those looking to get a mortgage.
Click to see today’s rates.
New Low Down Payment Home Loan Only for Certain Buyers
This home buying program targets a specific group of aspiring homeowners.
Not every home buyer will be eligible. Some will not meet credit score minimums. Others might earn an income that lies outside of eligible levels.
Applicants must meet the following requirements.
- They must make less than their area’s median income
- They must have a credit score of at least 660
- They must purchase the home as their primary residence
The loan was created to give potential FHA borrowers another mortgage loan option. This new loan could save borrowers over $100 a month in payments on a $150,000 30-year fixed rate mortgage near current interest rates, as compared to a similar FHA loan.
While an FHA loan has more flexible eligibility, those that meet the requirement for the “Affordable Loan Solution” loan may find that it is a better option for their budget.
Click here to check your home buying eligibility.
Mortgage Insurance Requirement Waived
Along with the benefit of a low down payment, this new mortgage program will not require private mortgage insurance (PMI).
The appeal to avoiding PMI payments is monthly payments will be lower. PMI was created to allow home buyers to get loans even if their down payment was below the 20% threshold. If a borrower gets an FHA loan and puts 5% down, they would be required to pay PMI. PMI can significantly increase your monthly mortgage payment in exchange for the benefit of a reduced downpayment.
This new loan program is backed by Freddie Mac and non-profit Self-Help, so the borrower doesn’t need to pay any form of mortgage insurance premiums. This could save home buyers a decent amount of money over the life of the loan — money that can instead go to increasing your home equity.
Other loan options may still be a better fit for some home buyers than Bank of America’s new program. Their minimum credit score of 660 is higher than the FHA loan, which requires just a 580 score to qualify for the 3.5% minimum down payment.
Roughly half of the country has a credit score below 660. This, along with other restrictions, may make it difficult for some home buyers to get approved for a conventional mortgage.
Plus, Bank of America has not specified what their mortgage rates are on this program. Even without PMI payments, the new loan program could mean a higher interest rate than FHA, Conventional 97 or HomeReady loans, depending on your financial situation.
Other low down payment options available
Bank of America isn’t the only lender offering 3 percent downpayment loans. Large and small mortgage lenders and banks across the country offer low downpayment loans that are not specific to a single lender.
The HomeReady Mortgage
HomeReady is a Fannie Mae program that allows 3% down and a credit score of just 620. Guidelines limit the amount the eligible applicant can make in some areas of the country. In areas considered underserved, there is no income limit.
This loan is considered the first multi-generational loan, since buyers can use the income of non-borrowing household members to help them qualify. Adult children can qualify more easily when buying a bigger home they plan to live in with their elderly parents.
Click here to check your HomeReady eligibility.
Conventional 97 Mortgage
The Conventional 97 loan also requires just 3% down with a low credit score of 620. Borrowers will have to pay PMI, but on a 30-year fixed-rate mortgage these payments will go away after 10 years.
Quicken Loans has their own 3% down mortgage program called the Home Possible mortgage. While it does require PMI, borrowers can have a higher annual income with Home Possible than with Bank of America’s loan.
If borrowers are looking for low down payments, a USDA loan should not be overlooked. USDA loans require 0% down payment and the minimum required credit score is 640. Also, they do not require PMI, but rather an annual fee that is usually much lower than most mortgage insurance.
USDA loans are only available in areas that are less dense in terms of population, but many suburban areas are eligible. Borrowers may also make up to 115 percent of their area’s median income, making these loans less exclusive than most low-to-no down payment mortgages.
For home buyers with qualifying military service, a VA-backed mortgage loan is an attractive option. These loans are available with no down payment and lower interest rates. Borrowers won’t have to pay mortgage insurance either though there is a one-time funding fee that allows the program to be self-sustaining and is significantly less than monthly mortgage insurance premiums.
The best loan option not only depends on your down payment but also on your mortgage rate.
Mortgage rates change daily, and lower rates can make it even easier to afford a new home with a low down payment.
Click to see current mortgage rates.
How to Avoid PMI: Alternatives to Mortgage Insurance
Mortgage insurance — also called private mortgage insurance (PMI) — is a premium borrowers pay for the extra risk lenders must take when a down payment is less than 20 percent. But even if you have a smaller down payment, there are PMI alternatives. Below is a breakdown of different types of mortgage insurance and tips on how to avoid PMI.
Types of Mortgage Insurance
There are two ways you can be charged PMI if your down payment is less than 20 percent on a conforming loan.
The most common way is incurring PMI as a separate monthly fee in addition to your mortgage payment. This is called Borrower Paid PMI. You can model your own estimates for how this might look by using a mortgage calculator — just make sure you check the “Include PMI” box.
The other way is when your PMI is included in your mortgage payment in the form of a higher rate on your mortgage. This is called Lender Paid PMI. It means you don’t have a separate monthly fee for mortgage insurance, and instead pay a rate that’s about .375 percent higher than normal on your mortgage loan—and therefore a higher monthly mortgage payment.
Lender Paid and Borrower Paid PMI are for Fannie Mae- and Freddie Mac-backed conforming loans up to $417,000 (or higher in some local areas), and the reason it’s called “private” mortgage insurance is because the mortgage insurance provider is a private entity separate from the lender.
Another low down payment option is an FHA loan. With these loans, the FHA backs the loan and is also the insurance provider, so the mortgage insurance goes by the name FHA Mortgage Insurance Premium (MIP).
In total, FHA MIPs can be slightly more expensive— especially for lower down payments — because you have monthly insurance premiums plus an upfront insurance premium that you can either pay in cash or add to your loan amount.
Questions about mortgages? Find a lender on Zillow
How to Avoid PMI
Borrowers with low down payments often ask: how can I avoid PMI?
The easiest way to avoid PMI is by making a down payment of 20 percent or more. If you do this, you won’t have mortgage insurance on any loan.
Another way to avoid PMI is to use a second mortgage. The first mortgage must be capped at 80 percent of the home’s value to avoid PMI, and a second mortgage will usually allow for another 10percent financing on top of this, for a total of 90 percent financing.
If you do this, you will have a second mortgage payment, which can sometimes make the total cost of your financing the same as if you used Lender Paid or Borrower Paid PMI. So ask your lender to present comparisons of all three options.
Also note that if you’re putting down less than 10 percent, the second mortgage option is usually not available, because lenders typically cap total allowable financing at 90 percent if you’re using a second mortgage.
Alternatives to PMI
Borrowers with low down payment also often ask: are there alternatives to PMI?
The important distinction of this question versus the “How do I avoid PMI?” question is that alternatives often have the same cost, but they are just marketed differently.
An example that illustrates this point is a jumbo loan above $417,000.
Some jumbos allow for less than 20 percent down with no mortgage insurance. This will be marketed as a way to avoid mortgage insurance. However, from a fee standpoint, you’re not necessarily saving money because you’ll pay a higher rate on this loan — just you would with Lender Paid PMI on a conforming loan.
So technically, it’s an alternative to mortgage insurance, but you’re not avoiding the fees. This is clear in the marketing of a conforming loan with Lender Paid PMI, but it’s less clear when you’re getting a jumbo loan with less than 20 percent down, because these loans are usually marketed with phrases “no mortgage insurance.”
How to Cancel PMI
If you have a conventional conforming loan, you can typically ask your lender to consider cancelling your mortgage insurance once you have reached 22 percent equity in your home — meaning that your loan has been paid down to 78 percent of the purchase value of your home.
If you think you’ll get to this level within a reasonable number of years, you will want Borrower Paid PMI instead of Lender Paid PMI.
If you have Lender Paid PMI, your mortgage insurance comes in the form of a higher rate on the loan, and this increased cost is therefore with you for the life of the loan. The same would go for a jumbo mortgage, since there’s no mortgage insurance fee for low-down jumbos, but instead, the rate is higher.
For FHA loans, you’ll most ly pay the FHA MIP for the life of the loan. Here’s a breakdown of when FHA MIPs are cancelled.
Questions about mortgages? Find a local lender on Zillow who can help
What Is Private Mortgage Insurance (PMI)?
You’ve done your research, you’ve kept an eye on the housing market, and now, it’s time to make an offer on your perfect home. As you move through the final steps of the mortgage approval process, you (and most other homebuyers) will probably encounter a new term: private mortgage insurance, or PMI.
Let’s take a look at PMI, how it works, how much it’ll cost you, and how you can avoid it!
Private mortgage insurance (PMI) is insurance coverage that homeowners are required to have if they’re putting down less than 20% of the home’s cost. Basically, PMI gives mortgage lenders some backup if a house falls into foreclosure because the homeowner couldn’t make their monthly mortgage payments.
Most banks don’t losing money, so they did the math and determined that they can recover about 80% of a home’s value at a foreclosure auction if the buyer defaults and the bank has to seize the house. So, to protect themselves, banks require buyers to pay an insurance policy—the PMI—to make up the other 20%.
How Does PMI Work?
PMI is a monthly insurance payment you’ll make if you put less than 20% down on your home. It’s not an optional form of mortgage insurance, some other mortgage insurance plans you might have seen out there. Here’s how it works:
- Once PMI is required, your mortgage lender will arrange it through their own insurance providers.
- You’ll be told early on in the mortgage process how many PMI payments you’ll have to make and for how long, and you’ll pay them every month on top of your mortgage principal, interest and any other fees.
- You’ll stop paying PMI on the date that your lender has calculated that your principal balance on your mortgage reaches 78% of the original appraised value of your home. After this, the PMI stops, and your monthly mortgage payment will go down.
PMI in no way covers your ability to pay your mortgage—it’s protecting the bank, because they’re the ones lending you more than 80% of the sale price! Once you have to pay PMI, you’re stuck paying those insurance premiums to the bank whether or not you default and go into foreclosure.
How Much Does PMI Cost?
The amount you’ll pay every month for your PMI all depends on your lender and how much of a deposit you’ve put down on your home.
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For traditional mortgages that you get from your bank or a mortgage company, PMI premiums are calculated using your loan total and range from 0.55% to 2.25% of the loan or more.1
Let’s pretend you’ve bought a house for $250,000 with a 10% down payment:
|Home Bought For:||$250,000|
|Down Payment:||$25,000 (10%)|
|Total Loan Amount:||$225,000|
|Rate of PMI:||1%|
|Monthly PMI Premium:||$187.50 (1% of $225,000)|
|Annual PMI Premium:||$2,250|
You could pay the annual premium up front with your closing costs or split it into monthly payments over the first few years of your mortgage. But if you’re paying monthly, you’ll also pay some interest on that premium! You can find out how PMI will impact your mortgage with our mortgage calculator.
What most buyers don’t realize is that PMI can add hundreds of dollars a month to their mortgage payments. And PMI varies, depending on the type of mortgage. If you’re considering an FHA or other non-traditional loan, beware! You’ll encounter costly PMI charges—and that’s just one of the reasons you should avoid those loans altogether.
Finding a way to lower or avoid PMI just makes sense. Our example shows PMI charged at only 1% of the total mortgage. Many companies charge more—up to 2.25%—and those higher premiums could mean you’d spend more than $5,000 over two years!
That’s money you probably don’t have (or want) to spend. Luckily, there are ways you can reduce, or even eliminate, your PMI costs.
How to Get Rid of PMI
Now, for some good news! There are a couple of things you can do to say goodbye to PMI.
1. Pay Extra on Your Mortgage Every Month
You could overpay on your mortgage every month and reach the point that you owe 80% or less, faster. That could get pretty tricky, though, because you’d have to find the extra cash every month.
But let’s take our example above and pretend you are able to pay off an extra $25,000 in a few years. Why not wait to buy the house and save up for a year or so? You could then buy that $250,000 dream home, be able to put down a 20% deposit, and avoid PMI completely!
2. Get a New Home Appraisal
Keep track of your home’s value! If it ends up being worth more than it was the year before (because more people are moving to the area, for example), this means more equity in your name.
Ask for a new appraisal from your lender if you think your home value has risen enough to boost your equity to more than 20%. As long as you owe less than 80% of the new appraisal, you can write to your mortgage lender and request to end PMI.2 But it’s up to you to pay for the new appraisal and follow the proper steps when asking your lender to end PMI early.
Having your home appraised after a few years, along with paying a little extra in mortgage payments every month, could get you to that magical 80/20 threshold much faster—and that equals big savings!
How to Avoid PMI Altogether
The easiest way to avoid paying PMI is to avoid a mortgage entirely by saving up and making Dave’s recommended 100% down payment. You’d be amazed at how affordable home shopping can be when you pay cash for your house!
But if you’re not quite there yet, you can still avoid PMI by putting down 20% or more of your future home’s cost. This might mean holding off on the house search until you’ve saved enough for that down payment, but think of the money you’ll save by avoiding PMI!
We know the mortgage process can be a minefield, but you don’t have to go through it alone! Working with a trusted mortgage company will give you peace of mind, knowing you’re making the best decision with the best information available.
That’s why Dave recommends Churchill Mortgage to help you streamline the mortgage process, cut through the clutter, and stay on the path to winning with your finances.
Get some reliable mortgage advice today!
Do I Need Mortgage Insurance?
Photo credit: © iStock/Jerry Moorman
Some people have lots of money for a down payment. For everyone else, there’s mortgage insurance. If you have already determined that you can’t afford a standard down payment on a home (usually 20% for conventional loans) but you still want to buy, don’t despair. Mortgage insurance exists to help make you a more attractive candidate to lenders.
What is mortgage insurance?
Here’s the deal: you want to borrow lots of money but you don’t have much saved up, so the bank isn’t sure it can trust you. How do you prove that giving you a mortgage isn’t too risky? By buying mortgage insurance.
With private mortgage insurance, you pay additional money each month to give the bank the peace of mind that comes with knowing they’ll be covered by the insurance policy if it turns out you can’t make your mortgage payments. Un with most other forms of insurance, with mortgage insurance you pay the premiums but you’re not the beneficiary — the bank is.
Do conventional loans require mortgage insurance?
If you’re getting a conventional mortgage and your down payment isn’t up to the 20% mark, you’ll need to pay for a private mortgage insurance (PMI) policy. Private mortgage insurance premium rates vary the loan-to-value ratio on the home, your credit score and whether your mortgage is fixed-rate or variable-rate.
(The better your credit, the lower your PMI payments will be — yet another reason to check, build and maintain your credit.) The loan-to-value ratio is the amount of money you’ve borrowed for the home compared to the value of the home.
The more money you use as a down payment, the less you have to borrow and the more favorable this ratio is in the eyes of the lender.
Because PMI is tied to the loan-to-value ratio on your home, the amount of PMI you pay each month will decline over time as you build equity. (Building equity means you are paying off some of what you borrowed so you own a larger percentage of the house.) Don’t think you’re locked in to paying PMI for the life of the mortgage, either.
Thanks to the Homeowners Protection Act of 1998, when your loan is scheduled to reach 78% of the home value or sales price (whichever is less) the bank has to cancel your PMI.
If you’ve paid on time and you think your home’s value has changed since the time of purchase, you may even be able to negotiate an earlier cancellation of your PMI.
If you discover that your PMI wasn’t canceled when it should have been you may be eligible for a mortgage insurance premium refund.
Here’s another tip: Don’t count on your lender to tell you when your PMI is eligible for cancellation.
As you can imagine, banks often drag their heels at this stage, hoping to get more payments borrowers who haven’t realized they’ve hit the 22% equity mark. The solution? Be pro-active.
Keep track of how your payments are eating away at your loan and contact the bank to let them know that your PMI cancellation date is coming up.
What if I have an FHA loan, not a conventional loan?
Why didn’t you say so? Mortgage insurance for loans backed by the Federal Housing Administration works a little differently.
With most FHA loans, you’ll need to pay for both the up-front mortgage insurance premium (UFMIP) and the annual mortgage insurance premium (MIP).
The UFMIP is calculated as a percentage of your loan amount, regardless of the term of the loan or the loan-to-value ratio (LTV).
The annual MIP, on the other hand, takes into account both the loan term and the LTV. It’s expressed in basis points, with one basis point equal to 1/100th of 1%. Your annual MIP, broken down by month, will get added to your regular mortgage payments.
Although FHA gets government funds to run its programs, the money you pay in mortgage insurance helps keep it afloat. That makes FHA insurance fees similar to the funding fees for VA loans.
VA loans have fees?
Yup. VA-backed loans, FHA loans, require some money from borrowers on top of what taxpayer money provides. While VA loans don’t require mortgage insurance, they do require a one-time funding fee that’s similar to the FHA loan’s UFMIP.
How can I get paying mortgage insurance?
If you don’t want to pay mortgage insurance, try to bump your down payment up to the 20% mark. You can wait longer to buy, ask for help from friends or family, etc. A lot of people don’t factor in the cost of mortgage insurance when planning their housing budget.
Could you afford to put a little more down now to avoid paying mortgage insurance later? If so, go for it! Our mortgage calculator will help you calculate what your mortgage insurance premium would be different down payment amounts.
While a 20% down payment is the best way to avoid paying PMI, there is another way. This involves taking out two loans at the same time. Often called a piggyback, 80/10/10 or 80/15/5 loan, it essentially fills in the gap between how much money you have available for a down payment and that magic 20% of the home value.
In this scenario, you put down 10%, take out a mortgage for 80% and a piggyback loan for 10%. This loan will usually come with a higher interest rate. Whether a piggyback loan makes sense will depend on just how high that interest rate is, but a piggyback loan does mean you avoid paying PMI.
Not anymore. Between 2008 and 2013 Congress allowed buyers to write off their PMI mortgage premium payments but that deduction ended. That’s another reason to save up for a bigger down payment and avoid PMI if you can.
What happens to my PMI if I refinance?
Photo credit: © iStock/RiverNorthPhotography
Great question! Remember that to avoid PMI your loan-to-value ratio must be 80% or less. If your home has appreciated since you bought it, you may be closer to the 80% ratio than you think.
You can also make improvements to the home to increase its value and by extension lower your loan-to-value ratio.
The basic principle is this: if you owe the same amount as you did before the re-appraisal but your home is suddenly worth more, your loan-to-value ratio has gone down.
If the value of your home has gone up, refinancing to get rid of PMI might be the right move, but you’ll need to consider the cost of the refinance itself. That’s because refinancing comes with the expense of a new appraisal and a new set of closing costs.
We hope it goes without saying, but we’ll say it anyway: before you commit to a costly refinance, check your home equity and see if you’re already eligible for PMI cancellation. And remember, you can also refinance from an FHA loan to a conventional mortgage if you want to avoid MIPs.
No one actually s paying for mortgage insurance but for many people it’s the only way to secure a mortgage and get on the property ladder. If you’re in an area where it’s much cheaper to buy than rent, financing a home purchase — even if you’ll need PMI — can save you money in the long term.
PMI: What Private Mortgage Insurance Is And How To Avoid It
Private mortgage insurance, also known as PMI, is generally required when you purchase a home with less than 20 percent down. The extra charge helps offset the risk to your lender, and it’s especially common for government-backed loans, such as FHA and USDA mortgages, which typically allow minimal down payments and are popluar among first-time homebuyers.
In most cases, you need to make an upfront payment for your PMI at closing then additional monthly payments on top of payments towards your mortgage.
What is PMI?
Private mortgage insurance or PMI is a type of insurance that conventional mortgage lenders require when homebuyers put down less than 20 percent of the home’s purchase price. Borrowers with PMI pay a mortgage insurance premium, and costs vary by lender.
The insurance protects lenders in case the homeowner defaults on the loan.
While it doesn’t protect the buyer from foreclosure, it does allow prospective homebuyers to become homeowners, even if they can’t afford a 20 percent down payment.
If your lender determines that you’ll need to pay PMI, it will coordinate with a private insurance provider, and the terms of the insurance plan will be provided to you before you close on your mortgage.
When you have PMI, you’ll need to pay an extra fee every month in addition to your mortgage principal, interest, property taxes and homeowners insurance.
Your loan documents may also indicate when you’ll be able to stop paying PMI, usually when you build up equity equal to at least 20 percent of your home’s value.
This means the remaining balance of your loan is 80 percent or less of your home’s total value.
Once you’ve reached 20 percent equity — either through paying down your loan balance over time or through rising home values — you can contact your lender (in writing) about removing PMI from your mortgage. Loan servicers must terminate PMI on the date that your loan balance is scheduled to reach 80 percent of the home’s original value.
How much does PMI cost?
According to the Urban Institute, the average range for PMI premium rates was 0.58 to 1.86 percent as of November 2020. Freddie Mac estimates most borrowers will pay $30 to $70 per month in PMI premiums for every $100,000 borrowed.
Your credit score and loan-to-value (LTV) ratio have a big influence on your PMI premiums. The higher your credit score, the lower your PMI rate typically is. A high LTV will also generally make your PMI payments more expensive.
A quick primer on LTV if you’re not familiar: The ratio is essentially how much you’re borrowing compared to the total value of the asset you’re purchasing — in this case, a house.
Basically, the more you put down, the less you have to borrow, so the lower your LTV will be. If you put down 20 percent, your LTV is 80, and you won’t need to pay for PMI. Anything less, and you probably will be required to get the insurance.
The less you put down, the more insurance you’ll need to pay.
Here’s how it might play out:
|Down payment||$30,000 (10%)|
|PMI (per month)||$176|
|Monthly payment (principal, interest and PMI)||$1,314|
|Down payment||$60,000 (20%)|
|Monthly payment (principal and interest, no PMI)||$1,011|
PMI payment options differ by lenders, but typically borrowers can opt to make a lump-sum payment each year or pay in monthly installments.
Usually, borrowers couple the cost of the premium with their monthly mortgage payment, so they pay an extra fee every month. With this method, you’ll be able to find a full breakdown of the costs in your loan estimate and closing disclosure documents.
Some borrowers choose lump sum or “single-payment” mortgage insurance, instead, meaning they pay the full annual cost of their PMI upfront. The lump sum option is probably not a good idea if you’re thinking of moving or refinancing your mortgage, because the payment is not always refundable, even if you no longer hold the mortgage it was applied to.
The third option is a hybrid which allows you to make a partial upfront payment and roll the rest into your monthly mortgage bill. Your lender should tell you the amount of the upfront premium, then how much will be added to your monthly mortgage payment.
Ask your lender if you have a choice for your payment plan, and decide which option is best for you.
Do all lenders require PMI?
As a rule, most lenders require PMI for conventional mortgages with a down payment less than 20 percent. However, there are exceptions to the rule, so you should research your options if you want to avoid PMI.
For example, there are low down-payment, PMI-free conventional loans, such as PMI Advantage from Quicken Loans. The lender will waive PMI for borrowers with less than 20 percent down, but also bump up your interest rate, so you need to do the math to determine if this kind of loan makes sense for you.
If you’re eligible, VA loans don’t require PMI, which is helpful for homebuyers who don’t have enough saved up to make a large down payment.
Other government-backed loan programs Federal Housing Administration (FHA) loans require their own mortgage insurance, though the rates can be lower than PMI.
In addition, you won’t have an option to cancel the insurance even after you reach the right equity threshold, so in the long term, this can be a more expensive option.
Your credit score won’t affect the insurance rate for FHA loans, though it could be higher if you put down less than 5 percent.
Is there any advantage to paying PMI?
PMI is a layer of protection for lenders, but an added expense for you as a borrower. However, that doesn’t mean it’s all downside for homebuyers.
PMI might allow you to purchase a home sooner because you won’t have to wait to save up for a 20 percent down payment.
If your credit score is high and your LTV is relatively low, you should be able to get a low PMI rate, which will make your mortgage more affordable overall.
In some cases, paying PMI can even help you build wealth faster.
Homeownership is usually seen as an effective long-term wealth building tool, so owning your own property as soon as possible lets you start building equity sooner, and your net worth will expand as home prices rise.
If home prices in your area rise at a percentage that’s higher than what you’re paying for PMI, then your monthly premiums are helping you get a positive ROI on your home purchase.
Note that PMI is also deductible for tax years 2018 and 2019 (retroactive) and 2020.
How do I avoid private mortgage insurance?
- Put 20 percent down. The higher the down payment, the better. At least a 20 percent down payment is ideal if you have a conventional loan.
- Consider a government-insured loan. While conventional loans are the most popular type of home financing, they’re just one of many options. Look at FHA, VA and other types of home loans to make sure you’re getting the right one for your situation. VA and USDA loans do not require mortgage insurance.
FHA loans, however, do come with two types of mortgage insurance premiums: one paid upfront and another paid annually.
- Cancel PMI later. If you already have PMI, keep track of your loan balance and area home prices.
Once the loan balance reaches 80 percent of the home’s original value, you can ask the lender to drop the insurance premiums.
Private mortgage insurance adds to your monthly mortgage expenses, but it can help you get your foot in the homeownership door.
When you’re buying a home, check to see if PMI will help you reach your real estate goals faster.
Don’t agree to a mortgage without comparing offers from at least three different lenders, though — that way you can try to get the best rate and terms for your specific financial situation.
With additional reporting by Sarah Li Cain