Learn how to get a loan without Private Mortgage Insurance (PMI). Explore strategies like larger down payments, VA loans, and piggyback mortgages. Lenders often require Private Mortgage Insurance (PMI) when a borrower makes a deposit of below 20% of the loan amount. PMI covers the lender against the risk of borrower failing to repay the amount owing after the loan has been made to them.
Because of the coverage offered to the lender against the risk of default, it becomes a burden for the borrower. Luckily there are ways to remove PMI and reduce costs on your mortgage. This guide will try to cover the details on PMI, the reasons for its requirement and how one can obtain a loan without achieving the desired goal.
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance refers to a kind of insurance policy availed to a lending organization to protect it in the event that a borrower is unable to make repayments on their mortgage. This insurance is required in most conventional loans where the cash received as the down payment of the home is less than 20% of the value of the house. PMI costs can add between 0.3 and 1.5 percent of the amount availed as a loan within a year which adds upon the monthly installments.
Why People Get a Loan Without Private Mortgage Insurance?
Extra Costs: The most significant disadvantages causing people to oppose PMI is the monthly extra charges it suggests to pay.
No Benefit to Borrower: While there are NO economic risks on your side and you keep paying the premiums, it does not provide PAS risks coverage unless you pay.
Impact on Affordability: The added on cost of PMI would touch quite literally the amount of home you would be able to buy.
Strategies to Avoid PMI
Here are some practical strategies for securing a loan without the burden of PMI:
Make a 20% Down Payment
Out of all the options, the simplest way to avoid paying PMI is to ensure that a minimum of 20% of the purchase price for the home is paid upfront as a down payment. This acts to lower the risk taken by the lender thus obviating the need for PMI.
Piggyback Loans (80-10-10 Loan)
How It Works: With an 80-10-10 loan, you take out two mortgages simultaneously. The first mortgage covers 80% of the home’s value, the second mortgage (or home equity loan) covers 10% and for the remaining 10% you make a down payment.
Benefits: This structure allows you to finance a home with a mortgage without PMI since no one loan is more than 80% of the value of the house.
Considerations: While this strategy avoids PMI, the second loan is usually more expensive. Therefore, it is essential to do a cost comparison.
Lender-Paid Mortgage Insurance (LPMI)
What it is: Some lenders may provide what is known as LPMI, where the mortgage insurance is included in the interest of the loan, as opposed to a separate LPMI payment every month.
Benefits: For LPMI, you will not have to pay for PMI monthly in addition to your mortgage payments.
Considerations: The downside is that your interest rate will be higher, which could mean having to pay more during the life of the loan.
VA Loans for Veterans and Active Duty Service Members
What It Is: VA loans, which are for veterans and active members of the military, do not require any PMIs, regardless of the amount of down payment.
Benefits: Like all VA loans, such loans come with very low interest rates and do not require PMI. Other VA loans do not need a down payment.
Considerations: There is a VA funding fee. However, although this does not add to the overall expense of the loan, it can be incorporated into the loan amount.
FHA Loans with 10% Down Payment
What It Is: Most lenders require mortgage insurance with FHA loans. This is however flexible, particularly if you are buying with a 10% deposit or above, as the mortgage insurance can be extremely lowered.
Benefits: This is another way to avoid excessive insurances now that you are unable to provide the 20% provision.
Considerations: You must also consider that most of FHA cuts last for the lifetime of the loan, so if your equity is less than 10%, the mortgage insurance is likely to be included for the life of that loan as opposed to options of conventional loans.
Ask About PMI Cancellation
What It Is: You accrue enough equity to warrant the revocation of PMI by the lender after you develop enough equity which is normally around 20%.
Advantages: If you need to pay PMI at the beginning, you should know it is for limited time. Extra payments can help accelerate the pace at which one develops equity.
Disadvantages: Monitor your equity, and be ready to request the cancellation of PMI as it becomes eligible.
Get a Gift or Assistance from Family for the Down Payment.
What It Is: There are family members who might give you a cash gift that you can use for a down payment. This can also apply when completing a request for assistance programs with down payment requirements.
Benefits: It means that the monthly outlay towards the mortgage lessens, and more favorable conditions are likely to be offered.
Considerations: Such a gift must also be accompanied by documentation as appropriate to your wholesale lender’s policies.
Tips for Avoiding PMI.
Improve Your Credit Score: Normally, a consumer with a higher credit score will be given better loan terms and possibly a lower down payment.
Shop Around: Different lenders have different loan requirements. Some might have lenders who will provide specialized loans without the need for PMI.
Negotiate with Your Lender: Some lenders offer to avoid making a monthly PMI payment if an increased interest rate is paid. Just make sure to compute if such exchanges are of any importance to you in the long run.
Conclusion
Avoiding PMI may actually benefit you and may cause a decrease in overall mortgage costs. There is also a chance of acquiring a loan without the additional cost of PMI through looking for other options on loans and also increasing the down payment or using special loan programs. Do not forget to evaluate the total costs associated with each approach, including interest rates and loans terms with regards to your personal situation as one option may turn out to be less costly than others.
