Making an investment in property is a major decision, and one that requires extensive research. One important factor to research is the potential for Private Mortgage Insurance (PMI). At LBC Mortgage, we often hear from potential homebuyers that they would like to avoid mortgage insurance on their home loans and we understand that. So, read the article to learn more about the most effective ways to avoid PMI.

What is PMI?

Private mortgage insurance (PMI) helps to ease the process of obtaining a home loan that guarantees the lender will receive full repayment even if a homebuyer defaults or foreclosure. This type of insurance is beneficial for individuals with lower amounts saved for a down payment on a potential property. PMI allows home buyers to get the exact amount without having to wait until they can save enough for a substantial down payment.  While it comes at an additional cost, private mortgage insurance often helps make homeownership more attainable and can help individuals secure their dream house sooner than they would be able to without it.

But why does Mortgage Insurance even exist?

Mortgage insurance exists because the lender decided that an 80 percent loan to value is the greatest level of risk that the lender is prepared to bear without insurance. Mortgage insurance is simply a policy that protects the lender in case of a default. If mortgage insurance wouldn’t exist, you would need to pay a 20% down payment to purchase or refinance a house.

What’s the Actual Cost of Mortgage Insurance?

Mortgage insurance may also be seen as the expense of borrowing the difference between 80 percent and the amount of down payment you have. When you think about it this way – that’s the cheapest money you’ll ever borrow! It’s far less expensive than any personal loan or credit card condition, with average mortgage insurance added varying from 0.3% to 0.85%. Even if you have the money for a down payment, putting it into your home equity makes it untouchable and possibly costly in the future. You are more ‘flexible’ if you keep your reserves. The cost of investing that money in equity includes the risk of higher interest rates in the future if you have to refinance to get that money out.

Best Ways to Avoid Paying Mortgage Insurance

Just because you shouldn’t be afraid of mortgage insurance doesn’t mean you should enjoy paying it. There are various options for getting out of mortgage insurance.

1. Pay a 20% down payment

A great way to avoid Private Mortgage Insurance (PMI) is to make a down payment that is equal to at least one-fifth of the purchase price of the home. Many lenders require PMI if the borrower puts less than 20 percent towards the original loan amount, as this contributes to a higher risk for the lender. Paying PMI will add a cost to your home loan payments, so one-fifth of the purchase price upfront could be a great financial investment in avoiding added costs in the long run.

2. Refinance your mortgage

Refinancing your mortgage after a few years is a great way to reduce the cost of ownership and potentially eliminate the payments for private mortgage insurance (PMI). It's important for homeowners to continually monitor their home loan situation and look for opportunities to refinance into better terms or lower rates. If refinancing would allow you to have 20% equity in the property, PMI could be removed from your loan and can make a significant impact on your monthly budget. 

3. Get a new home appraisal

Many homeowners are unaware that their home's value is based off of appraisals. If you believe the value of your home has significantly increased, then a new appraisal may reveal that you have more than twenty percent equity, which could be enough to do away with Private Mortgage Insurance (PMI).

4. Lender Paid Mortgage Insurance 

Most lenders offer lender-paid mortgage insurance options, which means that mortgage insurance will be paid by the lender but the cost of it will be built into the rates, so rates are usually a bit higher in these options. These programs will offer up to 95 percent loan-to-value for qualifying borrowers. This price range is usually restricted to the conforming loan maximum in your county.

5. Piggyback Loan

For homebuyers with as little as a 10% down payment, there is a boom of second mortgages and home equity line of credit programs on the market. These programs allow you to take out the first mortgage with an 80 percent loan to value, avoid mortgage insurance and then take out a second mortgage or home equity line of credit to bridge the difference up to 89.99 percent loan to value. Piggyback mortgages are often reserved for clients with higher credit scores

6. Mortgage insurance Buy-Out

For traditional mortgages with private mortgage insurance, most lenders can provide a buy-out option. This ‘buy-out’ is determined by your credit score and the loan-to-value ratio of the purchase. Buying out your PMI can cost up to 3 percent of the loan amount. Note: The funds for this buyout can come from a seller credit and/or a lender credit; they do not have to come from your own pocket.

Mortgage insurance vs homeowners insurance

Having both mortgage insurance and homeowners insurance gives an opportunity to avoid potential issues connected with large debts or unforeseen damages. Nevertheless, it is important to understand their key differences. Mortgage insurance is a form of protection for your lender if you fail to make your mortgage payments. It ensures that the funds are still received for the home loan even if there are issues with repayment.  Homeowners insurance provides an entirely different type of protection, securing your property and possessions from unexpected damage or loss due to events such as fire, theft, and weather-related occurrences. Such occurrences can have huge financial repercussions, and homeowners insurance can provide peace of mind that you have some coverage when unfortunate events occur. 

FAQs

Can I avoid PMI with a 10% down payment?

Yes! Making a 10 percent down payment could help the borrower avoid PMI if they also use a second loan to finance another portion of the home's cost. Using a second loan in this manner allows the buyer to have an ownership stake with less of an initial investment and still receive competitive terms. It is possible with an 80/10/10 piggyback loan.

How much down payment to avoid PMI?

PMI can have a significant impact on the long-term cost of your loan, so to avoid it, you need to put 20% or more down when purchasing a home. This initial lump sum payment can seem daunting upfront, but it can be viewed as an opportunity for early debt reduction, as well as a tool to save money in the long run by avoiding extra monthly bills.

How to remove PMI on FHA loan?

FHA loans do not require PMI fees. This is because unlike other loans, FHA loans require MIP, which stands for Mortgage Insurance Premiums, to protect lenders if a borrower defaults on the loan. The premiums are often smaller than PMI and ties into the loan amount, meaning that those with higher loan amounts can expect to pay more. MIP is also different from PMI in the fact that it stays with the lifetime of the loan and cannot under any circumstances be removed by the borrower, ensuring full protection for lenders.

Conclusion

Not all lenders can provide you with these programs. If you feel like you’d like to use one of the options mentioned above, look for a lender who has access to good credit programs or second mortgages, just like LBC Mortgage has. Some of these solutions will need some creativity on the part of your lender. The more experienced your loan officer is, the more probable it is that you will be provided with the best option for you. So, if you have more questions about your PMI - please don’t hesitate to ask here in the comments or give us a call, we’ll be more than happy to give you the answers.