Avoid PMI without 20% down: For those of you who don’t know what Private Mortgage Insurance (PMI) is, I will open with this definition:
“Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan. “
Basically, this is an added charge that is paid to the lender in the chance that you default on the loan, the lender will be safe. While PMI seems nice in theory, it is sometimes expensive. I remember on our first house, our PMI charge came out to $150 per month in addition to our mortgage. If I paid that for the 5 years it would have taken to build the 20% equity into the house required for PMI to drop off, I would have paid $9,000 in PMI charges. OUCH!
Of course there are several ways that PMI is paid: a monthly premium (most common), up-front premium (paid at closing) and sometimes both. For this post, we are talking about the most common PMI payment, the monthly premium.
If you’re serious about learning about how to avoid PMI without 20% down let’s get started!
The usual way: Let’s say you can do a full 20% down payment
We will start with the most obvious solution. If you’re looking to avoid PMI entirely, start with plunking down a full 20% (or more) down payment on your prospective home. While this is an option for some, it is not always an option for all. The nice part about putting down 20%+ on a home is it gives you the option to control your expenses yourself by avoiding escrow and PMI. If you don’t feel like tying up your hard-earned cash with a 20% down payment or simply do not have the cash to do so – keep reading.
1. If you’re a veteran, get a VA loan
VA residential loans are very powerful loan tools. Typically, they have a 0% down payment and good financing terms. The best part is that they do not include an additional charge for PMI. If you’re looking to get started and you or your significant other is a veteran, see if you qualify for a VA loan. If you’re looking to start investing in real estate, I have heard stories of plenty of people who got their start with this fantastic loan choice!
2. Lender-Paid Mortgage Insurance
Lender-paid mortgage insurance is what it sounds like. While this pay sound good in theory, you’re not getting a better deal. The lender will typically charge you a higher interest rate, so you don’t save too much money.
3. Consider mortgage programs that offer no PMI options
Here is a list of programs that offer no PMI financing options:
- Bank of America – Affordable Loan Solution Mortgage
- Flagstar Bank – Profession Loan
- Neighborhood Assistance Corporation of American (NACA) – NACA loan
- SoFI – 10% down PMI free loan
4. Piggyback loan
A piggy back loan is basically using two loans along with your down payment to close a deal. An example of this would be the bank supplies a mortgage of 80% of the house’s value, followed by a second mortgage of 10% (such as a home equity loan) followed by your down payment of 10%. Something like this is a called an 80/10/10.
This is the strategy I used when purchasing my personal home last year. Even though this strategy has fallen out of vogue following the housing bubble, my lender let me use it. We settled on a 75/15/10 arrangement as I only had a 10% down payment and wanted to avoid PMI.
5. Options if you already own your home: Refinance
If you have a mortgage with PMI, consider refinancing it! Refinancing your mortgage loan may be an option if you have enough equity built into your home. Of course, they will consider other things, like if there is a second mortgage on the home. However, if you’ve been in the home a while and have some equity, this is an option to consider!
Avoid PMI without 20% down – Conclusion:
PMI is one of my least favorite things. I know it is practical for the mortgage companies to use as they need protection but who wants to pay an additional $80-200 per month? I don’t! The other advantage behind PMI is that you can avoid paying escrow. Although I hate escrow almost as much as PMI, there isn’t enough room left in this article.
What strategies have you used to avoid PMI?
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