How to Avoid PMI Insurance: A Comprehensive Guide

If you’re planning to buy a home and looking for a mortgage, you may have heard about PMI (Private Mortgage Insurance). PMI is a type of insurance that lenders require if you make a down payment of less than 20% on your home. PMI helps protect the lender if you default on your mortgage. But, as a borrower, you have to pay for it. PMI can add hundreds or even thousands of dollars to your mortgage payments each year. In this guide, we’ll show you how to avoid PMI and save money on your mortgage.

What is PMI?

PMI is a type of insurance that lenders require if your down payment is less than 20% of the home’s purchase price. PMI protects the lender if you default on your mortgage. It’s an additional monthly expense that you have to pay along with your mortgage payments. The cost of PMI varies depending on the loan amount, credit score, and the loan-to-value (LTV) ratio.

For example, if you buy a $200,000 home and make a down payment of $20,000 (10%), your LTV ratio is 90%. Your lender may require you to pay PMI, which could cost you around $100 to $200 per month, or $1,200 to $2,400 per year. PMI is usually added to your monthly mortgage payment, so it can significantly increase your monthly expenses.

How to Avoid PMI

If you’re planning to buy a home and want to avoid PMI, there are several strategies you can use. Let’s take a look:

1. Make a High Down Payment

The easiest way to avoid PMI is to make a high down payment. If you can afford to make a down payment of 20% or more, you won’t have to pay PMI. A high down payment also reduces your monthly mortgage payments and the total cost of your loan. It’s important to save money for a down payment to avoid paying PMI.

2. Get a Piggyback Loan

A piggyback loan, also known as a second mortgage, is another way to avoid PMI. Instead of making a high down payment, you take out a second loan that covers the remaining balance. For example, if you make a down payment of 10%, you can take out a second loan for 10% of the home’s value. The second loan usually has a higher interest rate than the first mortgage, but it’s still cheaper than paying for PMI.

3. Look for Lender-Paid PMI

Lender-paid PMI is a type of mortgage insurance where the lender pays for PMI. The lender may charge you a higher interest rate to cover the cost of PMI, but you won’t have to pay for it directly. Lender-paid PMI can be a good option if you don’t want to make a high down payment or take out a second mortgage.

4. Improve Your Credit Score

Your credit score is a crucial factor in determining the cost of your mortgage. The higher your credit score, the lower the interest rate and the lower the cost of PMI. If you have a low credit score, try to improve it before applying for a mortgage. Pay your bills on time, reduce your debts, and avoid applying for new credit. A good credit score can help you save money on your mortgage.

5. Shop around for Mortgage Lenders

Not all mortgage lenders require PMI. Some lenders offer conventional loans with low down payment options and no PMI. You should shop around and compare mortgage lenders to find the best deal. Look for lenders that offer low interest rates, low fees, and no PMI.

FAQ

PMI is an additional expense that you have to pay if your down payment is less than 20% of the home’s purchase price. It can significantly increase your monthly mortgage payments and the total cost of your loan. By making a high down payment, getting a piggyback loan, looking for lender-paid PMI, improving your credit score or shopping around for mortgage lenders, you can avoid PMI and save money on your mortgage. Remember to do your research and choose the best option for your financial situation.