Private Mortgage Insurance (PMI) can be an unexpected expense for many homebuyers. Understanding how to avoid this cost is crucial for effective financial planning. Here are some strategies to help you bypass PMI on your US mortgage.
The most straightforward way to avoid paying PMI is to make a down payment of 20% or more when purchasing a home. When your down payment reaches this threshold, lenders typically waive the PMI requirement. This not only saves you money on your monthly mortgage payment but also reduces the total interest you will pay over the life of the loan.
Some mortgage programs are designed to help borrowers avoid PMI. For example, certain government-backed loans, like VA loans, do not require PMI regardless of the down payment. If you qualify, this can be a great option to consider. Additionally, some lenders offer specialized mortgage products that have alternative ways to eliminate PMI costs.
A piggyback loan involves taking out a second mortgage to cover part of the down payment. For instance, you could secure an 80-10-10 loan, where the first mortgage covers 80% of the purchase price, the second mortgage covers 10%, and you put down the remaining 10%. This structure helps you avoid PMI and could work well for those who can comfortably manage multiple loan payments.
Some lenders offer an option known as Lender-Paid Mortgage Insurance (LPMI). This means the lender covers the cost of PMI in exchange for a slightly higher interest rate on your mortgage. While your monthly payments might be higher, LPMI can be a good strategy if you plan to stay in your home for an extended period and prefer not to deal with separate PMI payments.
If you've already purchased your home and are paying PMI, consider refinancing your mortgage once you’ve built up sufficient equity. If your home has appreciated in value or you’ve made significant payments, you might have enough equity to drop below the 80% loan-to-value ratio, allowing you to eliminate PMI altogether.
Keeping track of your home's value can alert you to significant appreciation in the market. If your home’s value increases substantially, you may qualify to have PMI removed sooner than expected. Once you reach 20% equity through value increase, contact your lender to discuss removal options.
If you believe your home has gained enough value to cancel PMI, you can request a home appraisal. A successful appraisal showing that your equity has reached at least 20% can lead to the removal of PMI. Be prepared to incur some costs for the appraisal, but remember this could save you money in the long run.
Avoiding PMI can significantly impact your monthly expenses and overall financial health when purchasing a home. By employing these strategies — from making a 20% down payment to exploring refinancing options — you can minimize or eliminate PMI costs, making your mortgage more manageable.
