In the world of home mortgages, PMI – private mortgage insurance — has a terrible reputation.
Articles and experts warn home buyers not to pay for it. But why all the fuss?
And if PMI isn’t for you, how exactly can you avoid it? Let’s take a closer look.
3 things you should know about PMI
There are three things you should know about PMI:
- It’s paid for monthly by borrowers who make a down payment that’s less than 20% of the home’s purchase price or equity if they refinance.
- It protects the lender’s interest in the loan in case the borrower stops making the payments.
- It incentivizes lenders to make loans to borrowers who can’t afford a larger down payment or don’t want to tie up their cash. This tradeoff enables more people to own a home.
5 ways to avoid PMI with a small down payment
Avoiding PMI isn’t difficult. Here are five ways to do it:
1. A conventional loan with lender-paid mortgage insurance
To get a conventional loan without PMI, you’ll need a 20% down payment. If you don’t want to put down that much or pay for PMI yourself, lender-paid mortgage insurance (MI) might be an option for you.
With this strategy, the lender pays for MI on your loan and charges you a higher rate. The cost of the MI is, as lenders say, “baked into” your loan.
“Lender-paid MI usually results in a lower overall payment, but borrower-paid can be removed when your loan reaches 80%. Lender-paid gives you a higher rate for the life of your loan,” says Andrew S. Weinberg, principal of Silver Fin Capital Group, a mortgage company licensed in Connecticut, Florida, New Jersey, and New York.
2. 80% conventional loan with 10% piggyback loan and 10% downpayment
With this strategy, you get a second loan for 10% of your home’s purchase price, cutting your out-of-pocket down payment to 10% with no PMI.
The second, or “piggyback,” could be a second mortgage with a fixed rate or HELOC with a variable one. The piggyback rate will be higher than the first mortgage rate.
“Once the second is paid off, you’re left with a traditional conventional loan without PMI,” says Evan Roberts, owner of Dependable Homebuyers in Baltimore, Md.
Ready to buy a home with 10% down? Check out our review of mortgage lender SoFi
3. FHA loan
The FHA loan, insured by the Federal Housing Administration (FHA), allows a down payment as low as 3.5%.
PMI isn’t required, however you’ll have to pay an upfront mortgage insurance premium (UFMIP) of 1.75% of your loan amount and an annual mortgage insurance premium (MIP), paid monthly.
MIP ranges from 0.45% to 1.0%, depending on your loan amount, term, and down payment. Unlike PMI, which can be removed, MIP is required until you refinance or pay off your loan.
4. VA loan
The VA loan, guaranteed by the U.S. Department of Veterans Affairs, requires no down payment, no PMI, or any other type of mortgage insurance. Instead, you’ll pay an upfront funding fee that can be financed as part of your loan amount.
VA loans are designed for veterans, but active-duty personnel, military spouses, Selected Reverse and National Guard members, and certain other government employees may be eligible.
Looking for a VA lender? Read our review of Veteran United Home Loans
5. USDA loan
The USDA loan, insured by the U.S. Department of Agriculture, allows a minimum down payment of 10%. PMI isn’t required. Instead, you’ll pay an upfront fee of 1% of your loan amount and an annual MIP of 0.35%, paid monthly. The USDA loan is limited to low- and moderate-income borrowers in rural areas.
Find a PMI-free home loan
How can you avoid paying for PMI? Ask a lender to help you shop for a PMI-free home loan.
Head over to SuperMoney’s home mortgages review page to compare lenders side-by-side and find the best plan for you.