How to Avoid Paying Private Mortgage Insurance

Private mortgage insurance is an additional cost when purchasing a home. But what is it really and how can you avoid it?

A down payment is required when applying for a conventional mortgage. However, if the down payment is less than 20% of the home's price, the lender will view you as a high-risk borrower. Therefore, to protect your property investment, you will need to purchase Private Mortgage Insurance (PMI).

PMI typically costs between 0.5% and 1.5% of the mortgage loan amount per year. However, the cost can vary depending on the lender and your circumstances, so some PMI may exceed 1.5%. You may be required to pay PMI upfront at closing, monthly along with your mortgage payments, or both. Once you have enough equity in your home, you will no longer have to pay PMI.

Although PMI is meant to protect the lender, it can be advantageous for some borrowers. The insurance can put buyers in a home faster, especially if they haven't saved enough to cover a 20% down payment.

How to avoid paying PMI

Since PMI is an additional cost to purchasing a home, most people want to avoid it. Here are some ways you can avoid paying PMI:

1. Pay 20% advance payment

The easiest way to avoid paying PMI is to put down 20%. However, this might not be easy, especially for first-time homebuyers.

2. Blended Mortgage

As the term implies, a qualified borrower would take out a second mortgage that is “blended” with the first mortgage. The first mortgage is the traditional loan used to cover the purchase price. The second mortgage is to cover the remaining amount needed to make a 20% down payment.

3. Lender-Paid Mortgage Insurance (LPMI)

Another option is to get lender-paid mortgage insurance. Note that even though it says “lender-paid,” it is the borrower who pays the insurance premium.

There are two ways to get LPMI:

• One is to pay a lump sum at the beginning of the loan.
• Another way is to have a higher interest rate over the life of the loan, which could result in higher monthly payments.

Also, remember that LPMI does not cancel out eventually like regular PMI does.

4. Opt for loans with lower down payments

With an FHA loan, you can pay up to 3.5% down. And while they have a different premium insurance, it might be more suitable for borrowers.

If you qualify, you can also opt for a VA loan which has a 0% down payment and no mortgage insurance required.

When does PMI stop?

Under the Homeowner Protection Act, lenders or servicers must automatically cancel PMI once your mortgage balance reaches 78% of the purchase price.

Another way to stop PMI is when you reach the midpoint of your loan's amortization schedule. This is known as PMI termination. For a 30-year loan, once you reach 15 years, PMI will be canceled regardless of whether you've paid off 78% of the mortgage balance or not.

Keep in mind that both of these methods will only apply if you're current on your monthly payments.

Want to learn more about mortgages? Need help applying for a loan? Let mortgage broker Ebenezer Mortgage Solutions help you streamline your mortgage process. Call us today at (813) 284-4027.