In today’s market, a 20% deposit on a new home can be overwhelming. But put down less, and most lenders want protection from loss should you renege on the mortgage payments. This article explains how to avoid paying PMI (private mortgage insurance).
How to avoid paying PMI: What and why
In December last year, 76% of Americans buying a home put down less than 20%. When the deposit is so low, the lender wants to know that the mortgage payments are covered if the borrower defaults.
You’ll pay for mortgage insurance when:
- You’re buying, and your down payment is less than 20% of the purchase price
- You’re refinancing, and your equity is less than 20% of your home’s market value
Two main types of mortgage insurance exist. Private mortgage insurance (PMI), covering conventional mortgages, the most common loan, and backed by Fannie Mae or Freddie Mac.
The other type, government-backed mortgage insurance (MI), covers the Federal Housing Administration (FHA) loans. This insurance protects loans made by FHA lenders.
Mortgage insurance benefits you by allowing you to qualify for a loan with a smaller down payment while lessening the risk to the lender.
How to avoid paying PMI: The options
The downside of mortgage insurance is that it increases your total monthly payment and possibly your costs at closing.
Whether you’re buying a home or refinancing, there are four ways to avoid paying PMI or MI. Let’s take a look at the options.
Get around PMI the classic way and put 20% down
Get rid of PMI with a piggyback
Get a conventional loan and make a 20% down payment that’s 10% cash and 10% a second loan. Also called a “piggyback,” the 80-10-10 loan works because the primary mortgage is 80% (or less) of the buying price. With a 10% down payment and the second mortgage covering the other 10%, the borrower dodges the specter of private mortgage insurance.
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.
If you’re considering going this route, check out the lenders below.
Avoid PMI with an LPMI
Lender-paid mortgage insurance (LPMI) loans allow you to avoid a monthly mortgage insurance payment. In exchange, the interest rate is slightly higher than you would pay on a loan without an LPMI.
Once you reach 20% equity in your home, you may be able to save money by refinancing at a lower rate without mortgage insurance, depending on market conditions. Lender-paid mortgage insurance comes with a conventional loan that has a higher rate. One caution is this higher interest rate sticks with you for the life of the loan.
Get rid of private mortgage insurance with a VA loan
Home loans guaranteed by the U.S. Department of Veterans Affairs don’t require a down payment or mortgage insurance.
If you are a VA borrower, you’ll pay an upfront funding fee, which can be financed as part of your loan. It’s a benefit that turns into substantial monthly savings. Only U.S. military veterans and members of other specific military categories can qualify for this type of loan.
|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 MI premium|
|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 MI premium|
How to avoid paying PMI: Get around mortgage insurance
Mortgage insurance isn’t always forever.
If you have a conventional loan with PMI, canceling the insurance becomes possible when the loan balance drops to 80% of your home’s original value when the loan began.
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.
Your lender could require you to pay for an appraisal to prove that your home has maintained its value. If your home’s value declined, you would have to keep paying for PMI.
These rules apply to loans originated after July 29, 1999.
How to avoid paying PMI: Axe 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) for the duration of the loan. The MIP ends when you sell your home, pay off your loan, or refinance into a non-FHA loan.
Sometimes FHA MIP can be canceled, depending on when you got your loan, how long your loan term is, and your original down payment percentage.
How to avoid paying PMI: Final thoughts
Whether these options will cost you less than paying for mortgage insurance will depend on several factors:
Finding the right home loan is the first step. Getting stuck with the wrong loan is a costly mistake that you’ll want to avoid. Be sure to do your research before making a decision.
Use a mortgage insurance calculator or PMI calculator to help you figure it out. Review lenders, compare plans and find your best rate on SuperMoney’s home loans review page.
When you’re aware of your options and up-to-date with the current possibilities, you’ll be able to make an informed choice. Enjoy your new home, secure in the knowledge you got the best mortgage deal for your individual situation!
Marcie Geffner is an award-winning freelance reporter, editor, writer and book critic. Her work has been featured online and in print by The Washington Post, Los Angeles Times, Chicago Sun-Times, Urban Land, Business Start-Ups and Fox Business Network Online, among many other newspapers, magazines, and websites. With a bachelor’s degree in English from UCLA and MBA from Pepperdine University in Malibu, Geffner has impressive credentials in both story-telling and business management. A second-generation native of Los Angeles, Geffner now lives in Ventura, California, a surf city northwest of her hometown.