For many people, buying a home means taking out a mortgage. But did you know that in some cases, you can avoid paying mortgage insurance? Mortgage insurance is an additional cost that protects lenders in case the borrower defaults on the loan. It’s typically required if you put down less than 20% of the home’s purchase price. In this article, we’ll explore ways to avoid mortgage insurance and save money.
What is Mortgage Insurance?
Mortgage insurance is an insurance policy that protects lenders if the borrower defaults on the loan. It’s typically required if you make a down payment of less than 20% of the home’s purchase price. The insurance policy is paid for by the borrower, and the cost is added to the monthly mortgage payment. There are two types of mortgage insurance: private mortgage insurance (PMI) and government mortgage insurance.
PMI is typically required for conventional loans, which are loans that are not backed by the government. Government-backed loans, such as FHA loans and VA loans, require government mortgage insurance. The cost of mortgage insurance varies depending on the loan amount, the down payment, and the credit score of the borrower.
Private Mortgage Insurance (PMI)
PMI is a type of mortgage insurance that is required for conventional loans. It’s typically required if you make a down payment of less than 20% of the home’s purchase price. The cost of PMI varies depending on the loan amount, the down payment, and the credit score of the borrower.
For example, if you take out a $200,000 mortgage with a 5% down payment, the PMI premium could cost you an additional $100 per month. PMI payments are typically made until you reach 20% equity in the home, either through paying down the mortgage or the home appreciating in value.
Government Mortgage Insurance
Government-backed loans, such as FHA loans and VA loans, require government mortgage insurance. FHA loans are popular with first-time homebuyers and have more flexible credit requirements, but they require mortgage insurance for the life of the loan. VA loans are available to veterans and active-duty military members and do not require mortgage insurance.
The cost of government mortgage insurance varies depending on the loan amount, the down payment, and the type of loan. For example, if you take out an FHA loan with a 3.5% down payment, the mortgage insurance premium could cost you an additional $175 per month.
How to Avoid Mortgage Insurance
Now that you know what mortgage insurance is and how it works, let’s explore ways to avoid paying it.
Make a Larger Down Payment
The simplest way to avoid mortgage insurance is to make a larger down payment. If you can afford to put down 20% or more of the home’s purchase price, you won’t need to pay mortgage insurance. This can save you thousands of dollars over the life of the loan.
For example, if you take out a $200,000 mortgage with a 20% down payment, you’ll avoid paying PMI altogether. If you took out the same mortgage with a 5% down payment, you could end up paying over $20,000 in PMI premiums over the life of the loan.
Get a Piggyback Loan
A piggyback loan is a second mortgage that you take out at the same time as your first mortgage. The second mortgage is used to make a larger down payment, which can help you avoid mortgage insurance. For example, if you take out an 80% first mortgage and a 10% piggyback loan, you’ll only need to make a 10% down payment and won’t need to pay PMI.
Piggyback loans can be risky, however, because they typically have higher interest rates and shorter repayment terms than first mortgages. You’ll need to weigh the pros and cons carefully before deciding if a piggyback loan is right for you.
Look for Lender-Paid Mortgage Insurance (LPMI)
Lender-paid mortgage insurance (LPMI) is a type of mortgage insurance that is paid for by the lender, not the borrower. With LPMI, the lender pays the mortgage insurance premium upfront, and then passes the cost on to the borrower through a slightly higher interest rate on the loan.
LPMI can be a good option if you have good credit and plan to stay in the home for a long time. However, LPMI can be more expensive than PMI over the life of the loan. You’ll need to compare the costs of each option carefully before deciding which one is right for you.
Improve Your Credit Score
If you have a low credit score, you may be required to pay higher mortgage insurance premiums. Improving your credit score can help you qualify for a lower interest rate on your loan, which can reduce your monthly mortgage payment and the cost of mortgage insurance.
To improve your credit score, make sure you pay your bills on time, keep your credit card balances low, and avoid opening new credit accounts. You can also check your credit report for errors and dispute any mistakes with the credit bureau.
FAQ
Question |
Answer |
|---|---|
What is mortgage insurance? |
Mortgage insurance is an insurance policy that protects lenders if the borrower defaults on the loan. It’s typically required if you make a down payment of less than 20% of the home’s purchase price. |
How much does mortgage insurance cost? |
The cost of mortgage insurance varies depending on the loan amount, the down payment, and the credit score of the borrower. For PMI, the cost can range from 0.3% to 1.5% of the loan amount per year. For FHA loans, the annual mortgage insurance premium can range from 0.45% to 1.05% of the loan amount. |
Can I avoid mortgage insurance by making a larger down payment? |
Yes, if you can afford to make a down payment of 20% or more of the home’s purchase price, you won’t need to pay mortgage insurance. |
What is a piggyback loan? |
A piggyback loan is a second mortgage that you take out at the same time as your first mortgage. The second mortgage is used to make a larger down payment, which can help you avoid mortgage insurance. |
What is lender-paid mortgage insurance? |
Lender-paid mortgage insurance (LPMI) is a type of mortgage insurance that is paid for by the lender, not the borrower. With LPMI, the lender pays the mortgage insurance premium upfront, and then passes the cost on to the borrower through a slightly higher interest rate on the loan. |
Conclusion
Mortgage insurance can add thousands of dollars to the cost of a home loan. However, there are ways to avoid paying it, such as making a larger down payment, getting a piggyback loan, or improving your credit score. Before deciding on a mortgage, make sure you carefully consider the costs of mortgage insurance and explore all your options for avoiding it.