Most lenders require borrowers to pay for private mortgage insurance if the down payment is less than 20 percent of the value of the property. Mortgage insurance protects the lender from losses if the borrower doesn’t make the mortgage payments.
You may have to pay for mortgage insurance if you:
- Buy a home with a down payment that’s less than 20% of the purchase price
- Refinance with equity that’s less than 20% of your home’s market value
Mortgage insurance comes in two types:
- Private mortgage insurance, known as PMI
- Government-backed mortgage insurance called MI
4 ways to avoid paying private mortgage insurance
1. Put 20% down
2. Get a piggyback
Get a conventional loan and make a 20% down payment that’s 10% cash and 10% a second loan.
The second loan—the “piggyback”—might be a second home loan or home equity line of credit. Together, an 80% first loan, 10% second loan or credit line, and 10% cash down are known as 80-10-10 financing.
“We love 80-10-10 loans for clients who don’t want to pay PMI, yet don’t have the money for a full 20% down payment.
Once the second loan is paid off, you’re left with the traditional conventional loan without PMI,” says Evan Roberts, a real estate agent and owner of Dependable Homebuyers, a property investor in Baltimore, Md.
3. Get a loan with LPMI
Lender-paid mortgage insurance comes with a conventional loan that has a higher rate. The rate premium will stick with you as long as you keep your loan.
4. VA loan
Home loans guaranteed by the U.S. Department of Veterans Affairs don’t require a down payment or mortgage insurance.
|Type of Loan||Minimum Down Payment||PMI?|
|Conforming mortgage without PMI||20%||No|
|A conforming mortgage with PMI||3%||Yes, or you’ll pay a higher rate for LPMI|
|Conforming mortgage with a piggyback loan||10%||No, but you’ll need a second loan or HELOC|
|FHA loan||3.50%||No, but you’ll have to pay upfront and annual MIPs|
|VA loan||0||No, but you may have to pay an upfront funding fee|
|USDA||10%||No, but you’ll have to pay upfront and annual MIPs|
How to get rid of PMI
Mortgage insurance isn’t always forever.
If you have a conventional loan with PMI, you can ask your lender to cancel it when your loan balance drops to 80% of your home’s value at the time that you purchased it or refinanced into the loan.
You can also ask your lender to cancel PMI if you make extra payments and reach the 80% loan-to-value (LTV) ratio sooner. If you don’t request termination at 80% LTV, your lender may end your PMI when your loan hits 78% LTV.
To get your lender to cancel PMI, you’ll have to make your request in writing, have a good payment record, and be current on your payments. You may have to sign a statement saying you don’t have other loans on your home.
You also may have to pay for an appraisal to prove that your home is worth more than it was when you got the loan. If your home’s value has declined, you may have to keep paying for PMI.
These rules apply to loans originated after July 29, 1999.
How to cancel an FHA MIP
If you have an FHA loan, insured by the Federal Housing Administration, you may have to pay the mortgage insurance premium (MIP) until you sell your home, pay off your loan, or refinance into a non-FHA loan.
In some cases, FHA MIP can be canceled, depending on when you got your loan, how long your loan term is, and what your original down payment percentage was.
A mortgage insurance calculator or PMI calculator can help you figure it out. But finding the right home loan is the first step.
Getting stuck with the wrong loan can be a costly mistake that you’ll want to avoid. So, make sure you do your research before settling.
Review lenders, compare plans and find your best rate on SuperMoney’s home loans review page.