Introduction
When purchasing a home, many buyers are faced with the decision of whether to put down less than 20% of the purchase price and pay for Private Mortgage Insurance (PMI) or to wait until they have saved enough to avoid this additional cost. PMI is an insurance that protects lenders in case the borrower defaults on their mortgage payments. It can add an extra 0.5% to 1% of the total loan amount to the annual mortgage payments, thus making it an expensive option for homeowners. However, there are certain strategies that can help buyers avoid paying PMI altogether. In this article, we will discuss some effective strategies for avoiding Private Mortgage Insurance.
1. Save for a larger down payment:
The most effective way to avoid paying PMI is by saving enough for a 20% down payment. By putting down a larger down payment, buyers can lower the amount of money they need to borrow, thus eliminating the need for PMI. Saving for a larger down payment may require some patience and discipline, but it can save homeowners thousands of dollars in the long run.
2. Opt for a piggyback mortgage:
A piggyback mortgage is a type of mortgage in which the borrower takes out two loans at the same time – one for the down payment and the other for the remaining amount. This results in the borrower having a lower loan-to-value (LTV) ratio for the primary mortgage, which can help them avoid PMI. However, it is important to carefully consider the terms of the second loan as it may come with a higher interest rate and may require a larger down payment.
3. Consider a Lender Paid Mortgage Insurance (LPMI):
Another option for avoiding PMI is to opt for Lender Paid Mortgage Insurance. In this case, the lender pays for the PMI and in return, charges a slightly higher interest rate on the mortgage. This may be a good option for those who are unable to save for a 20% down payment but want to avoid PMI. However, it is important to keep in mind that the interest rate will remain higher for the life of the loan, thus making it a more expensive option in the long run.
4. Look into government-backed loans:
Government-backed loans such as FHA loans, VA loans, and USDA loans have lower down payment requirements and do not require PMI. FHA loans require a minimum down payment of 3.5%, VA loans require no down payment for eligible veterans and active-duty service members, and USDA loans require no down payment for eligible rural and suburban homebuyers. However, these loans may have certain restrictions and requirements, so it is important to carefully review and compare them before making a decision.
5. Improve credit score:
A high credit score can help borrowers secure a lower interest rate, which in turn can help them avoid PMI. Lenders often require a minimum credit score of 760 to avoid PMI, but even a slight increase in the credit score can help lower the cost of the mortgage. Borrowers can improve their credit score by paying bills on time, reducing credit card balances, and correcting any errors on their credit report.
6. Negotiate with the lender:
If the buyer is unable to make a 20% down payment, they can try negotiating with the lender to waive off the PMI requirement. This may work if the buyer has a good credit score, stable income, and a low debt-to-income ratio. A higher interest rate or a larger down payment may be required in this case.
7. Refinance:
For homeowners who are already paying PMI on their mortgage, refinancing may be an option to consider. If the home has appreciated in value and the homeowner has made significant payments towards the principal, they may be able to refinance their mortgage to eliminate the need for PMI. However, refinancing comes with its own costs and it is important to carefully calculate the potential savings before making a decision.
Conclusion
In conclusion, Private Mortgage Insurance adds an additional cost to homeownership and can significantly increase the monthly mortgage payments. However, with proper planning and research, buyers can avoid this expense altogether. It is important to carefully consider all the available options and choose the one that best suits individual financial situations. Whether it is saving for a larger down payment, exploring alternative loan options, or improving credit scores, following these strategies can help homeowners save thousands of dollars over the life of their mortgage.
