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 downpayment 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 LTV.
Beyond these two options, there are few "cheap" ways out.
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 order to pay your PMI, most lender-paid mortgage insurance option require you to accept a mortgage rate increase of up to 75 basis points (0.75%).
This may be suitable to you, but be sure to discuss the LPMI option with your lender first -- especially because LPMI never cancels like borrower-paid PMI does.
Another option is to use "piggyback financing", but this will require a downpayment of 10 percent, usually.
With a piggyback loan, the buyer brings a 10% downpayment 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.
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.
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.
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 ExampleHome purchased for $265,000
The home buyer with a 740 credit score [excellent]
5% downpayment of $15,000
$250,000 30-year fixed rate mortgage
$110 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 investement.
The most important part to avoiding hefty PMI payments is to get multiple quotes. Click here to get up to 5 quotes.