Looking for a few ways to avoid paying private mortgage insurance? Fortunately, you have a few different options. Here are the most popular ones.
How to Avoid PMI: Put 20% Down
If a homeowner purchases a house with a low down payment, the bank is assuming additional risk by offering a mortgage. To help account for that risk, the homeowner will pay private mortgage insurance.
To counter PMI, the homeowner can choose to put at least 20% down on the purchase of the house. So if a house costs $200,000, the homeowner would need a down payment of at least $40,000. Anything less than that will likely require them to pay PMI, assuming you are getting a conventional loan or FHA loan.
Avoid PMI with a VA Loan
A lot of military veterans choose to use a VA loan to purchase their home. Even though there are downsides (for example having to pay a VA Funding Fee), there are some great advantages as well. One big advantage is the ability to purchase a home without PMI, regardless of how much money was put down on the home.
This is huge, especially for first time homebuyers. It isn’t exactly easy to save up tens of thousands of dollars for the purchase of a home, and this lets the veteran get into a home without paying PMI even if they don’t have much money saved up to put towards the house.
Avoid Private Mortgage Insurance by Piggybacking Loans
Another way to prevent paying PMI is by getting a piggyback loan. This is where you get two mortgages on the same home, usually to avoid paying PMI. The most common breakout is
- Mortgage #1: 80% of the purchase price
- Mortgage #2: 10% of the purchase price
- Down payment: 10% of the purchase price.
Sometimes this is called an 80-10-10 loan. Putting numbers to this, the purchase of a $200,000 house would have
- Mortgage #1: $160,000
- Mortgage #2: $20,000
- Down payment: $20,000
The primary advantage to this method is you do get to avoid PMI because you don’t have a single loan worth more than 81% of the purchase price.
There is a big downside though – this method can end up being more expensive than just paying PMI. You have to pay closing costs on both loans, so that adds up. Your second mortgage may also have a higher interest rate than the first, bigger loan.
Get Rid of PMI by Refinancing
If you already own a home, you may be able to refinance to get rid of PMI. This is the route a lot of homeowners take, especially right now with today’s low interest rates.
After the refinance, you will need to reach the 20% equity threshold to avoid PMI. If you have questions about whether or not you’d meet the threshold, ask your lender for guidance.
Do you have any questions about how to avoid paying private mortgage insurance? Give us a call at (562) 924-7884 and we’d love to answer any questions you have. We’re here for you!