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How To Avoid Paying Private Mortgage Insurance (PMI)

Craig BerryThe Mortgage Reports Contributor

How to avoid PMI without 20% down

Private mortgage insurance helps home buyers purchase homes with less than twenty percent down but, despite its benefits, some consumers aim to avoid their PMI at all costs.

For buyers who wish to avoid monthly PMI, there are several ways to go.

The first, and most obvious, route is to make a down payment of 20% or more. With twenty percent equity, PMI won’t apply.

Second, eligible military borrowers can apply for a VA loan which never charges mortgage insurance regardless of your down payment or lack thereof.

Third, the buyer can opt for a piggyback mortgage — one that uses a second mortgage to cover part of the down payment, therefore eliminating the PMI requirement.

Fourth, many lenders offer the option of Lender-Paid Mortgage Insurance (LPMI) which is similar to “regular” PMI, except that the lender pays the cost in exchange for a higher interest rate.

Lastly, many lenders create their own programs and decide not to charge any PMI on them, despite down payments as little as 3%.

Click here to connect with a low-down-payment lender. (Sep 24th, 2018)

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How to avoid paying PMI with Lender Paid Mortgage Insurance (LPMI)

You can get a Lender Paid Mortgage Insurance loan with as little as 3% down. However, the rate will be fairly high on that loan, especially if you don’t have an awesome credit score.

In order to pay your PMI, the lender requires you to accept a higher mortgage rate in return for no mortgage insurance. In reality, you’re still paying mortgage insurance, but it’s in the form of your interest payment.

Following is a chart showing the monthly cost of a $250,000 loan with either the LPMI or traditional PMI loan with a 720 credit score.

Down Pmnt LPMI Rate Loan + PMI Rate LPMI Pmnt Loan + PMI Pmnt
3% Down 5.375% 4.75% $1,400 $1,479
5% Down 5.25% 4.625% $1,380 $1,420
10% Down 5.00% 4.625% $1,342 $1,379

Rates may not be available. All rates used for example purposes only. PMI costs from MGIC Rate Finder.

In this case, the LPMI does save you a bit of money each month. However, you can never cancel LPMI, even if you pay your mortgage down below 80% of its value. Traditional PMI simply falls off when your loan balance hits 78% of the original purchase price. But your LPMI rate will not drop at that point.

Consider how long you will be in the home, whether you will eventually keep it as a rental, or other long-term plans before accepting LPMI.

How to avoid PMI with a “piggyback loan”

Another option is to use “piggyback financing”, but this will require a down payment of 10 percent, usually.

With a piggyback loan, the buyer brings a 10% down payment to closing and, instead of giving a 90% mortgage to make up the difference, the buyer takes two mortgages, “piggybacked” on one another.

The most common piggyback loan arrangement is an 80% first mortgage, a 10% second mortgage, and a 10% downpayment. This structure is often called an 80/10/10.

For buyers of condominiums, 75/15/10 piggyback loans are more common, mainly because mortgage rates are higher for condos with less than 25% down.

The second mortgage is often from the same bank or lender. But you might have to find your own 2nd mortgage if your lender does not offer these loans. A credit union or local bank is a great source of these loans.

Just make sure they know you are purchasing a home and you need the financing completed on a specific day. Let them know your closing date and make sure they can accommodate a quick closing if necessary.

You don’t need 20% down to buy a home, and PMI is not a terrible thing.

The best option is to talk to a lender with the knowledge that you have options.

Click here to find a knowledgeable lender and compare rates. (Sep 24th, 2018)

Mortgage programs that don’t require PMI

From time to time, lenders and banks create their own programs, and, sometimes they don’t require PMI.

Bank of America

For instance, Bank of America, at the time of this writing, offers the Affordable Loan Solution® mortgage. It requires just 3% down and does not require PMI. Pre-homeownership counseling is required through B of A’s network of counselors, and maximum income limits apply.

Bank of America does not state current rates for the program, but you can bet they are higher than for a traditional loan.

Flagstar Bank

Another huge, nationwide lender, Flagstar, offers what they call the Professional Loan. These loans are for individuals who are very likely to have high earning potential, but have just started in their careers. Think doctors, dentists, and lawyers with their own practices.

The loan requires no PMI, and very low down payments. As a bonus, student loans could be excluded from debt ratios.

Neighborhood Assistance Corporation of America (NACA)

This organization focuses on providing homeownership opportunities to low-to-moderate income individuals or those buying in underserved communities.

NACA touts no down payment, no closing costs, no points, below-market rates, and best of all, no PMI. Keep in mind that this loan is only for those who fit their criteria, and it’s unclear how many qualify for the loan.

Still, for those who qualify, this loan could be a real boon to their home buying endeavors.

SoFi

This lender offers a 10% down loan with no borrower-paid mortgage insurance. Great credit is required, but for the right individual, this loan could make sense.

CitiMortgage

This nationwide lender offers the HomeRun Mortgage which offers loans up to $453,100 (higher in high-cost areas) with 3% down and no PMI. These are fixed-rate loans which means a steady payment for years to come.

Homeownership education is required, but these courses typically require a small time commitment.

Rates for the program are not mentioned on the website, so buyers should compare this product to other no-PMI options on the market before pulling the trigger.

Check your eligibility for a low-down-payment loan here. (Sep 24th, 2018)

How Much Does PMI Cost?

Private mortgage insurance, like all insurance policies, varies in cost based on your particular risk to the bank. The smaller your downpayment, for example, the higher you should expect your PMI costs to run.

In general, PMI costs range from 30 basis points (0.30%) to 115 basis points (1.15%) of your loan balance annually. Your rate is based on your credit score, your equity/downpayment percentage, and your loan term.

PMI costs are typically paid monthly, divided into 12 monthly installments, then added to your monthly mortgage statement.

A Real-Life Example

Home purchased for $250,000
The home buyer with a 740 credit score [excellent]
5% down payment of $12,500
$237,500 30-year fixed rate mortgage

$103 in PMI monthly

However, PMI premiums change regularly. From state to state, and provider to provider, PMI costs will change.

And while PMI may be your only option when purchasing a home, not buying a home may be an even less fruitful investment.

The most important part to avoiding hefty PMI payments is to get multiple quotes.

Get a personalized mortgage payment + PMI quote here. (Sep 24th, 2018)

How do I get rid of Private Mortgage Insurance (PMI) once I’ve purchased a home?

In general, PMI can be canceled once your loan’s principal balance drops to 80% of your home’s original appraised value; or, to 80% of your home’s current market value.

FOR CURRENT HOMEOWNERS:

What If My Current Mortgage Has PMI?

If you are a homeowner who already has PMI, that’s okay. You’re making an excellent return on your mortgage insurance investment.

Still, you may want to get rid of your PMI, and that’s totally possible.

Via a refinance, you can eliminate any type of mortgage insurance as long as your new loan amount is 80% or less of your home’s current value.

You can now refinance. The new loan will not require PMI at all.

There are restrictions that sometimes apply, however. Depending on your lender and provider of PMI, you may be asked to show a history of timely payments; a minimum number of payments made (usually 12); or, the absence of a second mortgage.

Lenders are required to update you annually on your PMI cancellation options.

This includes notice of the Homeowners Protection Act of 1998 which required lenders to automatically terminate PMI once the homeowner reaches 78% loan-to-value (LTV), based on the lesser of the purchase price or appraised value from the date of purchase or refinance.

Note, though, that you must be current on your loan when you reach 78% LTV in order to have your PMI removed. If you’re not current at that time, your PMI will be terminated instead on the first day of the first month following the date you get current.

The Homeowners Protection Act of 1998 also states that homeowners are permitted to request PMI cancellation once they 80% LTV, based on the home’s original value.

The lender will not contact you, however. You will have to contact your lender.

Verify your new rate (Sep 24th, 2018)