Mortgage insurance can add a significant cost to homeowners who are unable to make a large down payment. However, there are several strategies to reduce these costs. Here’s how to pay less for mortgage insurance in the US.
1. Increase Your Down Payment
One of the most direct ways to lower your mortgage insurance premium is by increasing your down payment. If you can manage to put down at least 20% of the home’s purchase price, it is likely that you can avoid private mortgage insurance (PMI) altogether. This not only reduces your monthly payment but can also save you thousands over the life of the loan.
2. Opt for a Piggyback Loan
A piggyback loan involves taking out a second mortgage to cover part of the down payment. Typically structured as an 80-10-10 loan, you would put down 10%, take an 80% first mortgage, and a 10% second mortgage. This strategy allows you to circumvent PMI while also maintaining a lower overall loan amount.
3. Choose a Lender with Competitive PMI Rates
Not all lenders offer the same rates for mortgage insurance. It's essential to shop around and compare quotes from various lenders. Some lenders may provide lower PMI rates based on their risk assessment, so you can potentially save money simply by choosing the right lender.
4. Maintain a Good Credit Score
Your credit score plays a significant role in determining your mortgage insurance premium. By maintaining a score of 760 or higher, you can qualify for better rates. Make sure to pay bills on time, reduce outstanding debts, and keep credit utilization low to enhance your credit profile.
5. Consider a Federal Housing Administration (FHA) Loan
If you're a first-time homebuyer or have a lower credit score, an FHA loan might be suitable. While it does require mortgage insurance, the rates are often lower than conventional loans. Additionally, FHA loans can allow for lower down payments, typically around 3.5%.
6. Request Removal of PMI
Once you have built up enough equity in your home — usually 20% — you can request the removal of PMI. Your lender will usually require a home appraisal, and if the value of your home has increased or you've paid down your mortgage significantly, you may qualify for PMI cancellation.
7. Pay for PMI Upfront
Some lenders offer the option to pay PMI upfront as a one-time fee at closing. This can be a more cost-effective solution in the long run since it eliminates monthly PMI payments. If you have enough savings to cover these costs, this might be an attractive option.
8. Keep an Eye on Market Trends
The mortgage insurance market can fluctuate based on economic conditions. Keeping abreast of market trends may provide opportunities to refinance your mortgage at a lower PMI rate or secure more favorable loan terms.
By employing these strategies, homeowners can significantly reduce their mortgage insurance costs. It’s essential to do your research, maintain a strong financial profile, and choose the right loan products to minimize expenses associated with mortgage insurance.
