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How to avoid PMI without 20% down

Craig Berry
The Mortgage Reports contributor

You don’t need 20% down to avoid PMI

PMI (private mortgage insurance) is usually required for anyone buying a home with less than 20% down.

Understandably, many home buyers would rather avoid PMI.

That’s because PMI is an added cost for the borrower, but it only protects the lender if you can’t pay your loan back.

Keep in mind that there are benefits to paying private mortgage insurance, like the ability to buy a house with just 3% down.

But if you’d rather avoid PMI altogether, there are multiple ways to do so — even if you don’t have a 20% down payment. Here’s how.   

Verify your low-down-payment eligibility (Sep 24th, 2020)

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1. Get the lender to pay for your mortgage insurance

Lender-Paid Mortgage Insurance (LPMI) is exactly what is sounds like: the mortgage lender covers your insurance instead of asking you to pay it out of pocket. This is one way to avoid PMI.

Of course, there’s a catch.

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.

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.

Following is an example showing the monthly cost of LPMI versus traditional PMI with a 720 credit score.

Down Payment Regular PMI rate Mortgage Payment With Regular PMI LPMI Rate Mortgage Payment With LPMI
3% Down 3.25% $1,320 3.875% $1,140
5% Down 3.125% $1,150 3.75% $1,100
10% Down 3.125% $1,060 3.75% $1,040

Rates shown are for sample purposes only. Payments assume a $250,000 home price in WA with a 30-year fixed-rate mortgage.

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.

2. Use a “piggyback loan” with 10% down and no PMI

Another way to avoid PMI is by using a piggyback mortgage.

This is a unique loan structure where the buyer only needs 10% down.

But thanks to a second mortgage, which covers another 10%, the buyer effectively has a 20% down payment and does not have to get mortgage insurance.

The most common piggyback loan arrangement looks like this:

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 as the first mortgage.

But you might have to find your own second mortgage if your lender does not offer them. A credit union or local bank is a great source of these loans.

Just make sure the second lender knows 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.

Piggyback loans are a little-known type of mortgage that can be a great way to avoid PMI with less than 20% down.

Verify your piggyback loan eligibility (Sep 24th, 2020)

3. Find a low-down-payment program with no PMI

From time to time, lenders and banks create their own programs that allow a low down payment with no PMI.

These may even have additional perks for first-time home buyers, lower-income home buyers, or certain professionals (like teachers and doctors).

Here are just a few examples of no-PMI mortgage programs:

  • 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
  • Bank of America — At the time of this writing, Bank of America 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
  • CitiMortgage —This nationwide lender offers the HomeRun Mortgage which offers loans up to $510,400 (higher in high-cost areas) with 3% down and no PMI. Homeownership education is required, but these courses typically require a small time commitment
  • Movement Mortgage — This all-digital lender offers the “Dream to Own” mortgage, a conventional loan program with no mortgage insurance required. It also allows down payment and closing cost assistance up to 4% of the home price. A minimum credit score of 660 is required to qualify
  • Caliber Home Loans — If you’re buying a high-priced home, Caliber’s “Elite Access” program offers jumbo loans with just 5% down and no mortgage insurance. Currently, a jumbo loan is anything over $510,400 in most areas. Borrowers need at least a 740 FICO score to qualify, and 9 months’ worth of mortgage payments in ‘cash reserves’ (savings)

The tradeoff here is that no-PMI loans usually have higher rates. And, they often require a higher credit score to qualify.

Keep in mind that lenders can change proprietary mortgage programs at any time.

These programs are current at the time of writing, but double check with the lender to see what’s available before applying.

4. See if you qualify for a VA loan

For eligible veterans, service members, and other armed forces personnel, a VA loan is usually the best way to avoid PMI.

VA loans are available with 0% down, and they’re the only government-backed mortgage option with no monthly mortgage insurance payments.

There is a one-time ‘funding fee’ that borrowers have to pay to use a VA loan.

Lack of PMI and exceptionally low rates make the VA loan the best option for most eligible VA homebuyers.

Depending on your down payment and whether you’ve used a VA loan before, the funding fee is between 1.4% and 3.6% of the loan amount. But the total cost will likely be cheaper than what others pay for monthly mortgage insurance.

The lack of PMI, coupled with exceptionally low rates, is what makes a VA loan such a great deal for qualified veterans.

Recap video: How to avoid PMI

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 down payment, for example, the higher you should expect your PMI costs to run.

In general, PMI costs range from 0.30% to 1.15% of your loan balance annually. On the bright side, that means PMI costs go down each year as your loan balance gets smaller.

Your PMI rate is based on your credit score, your equity/down payment percentage, and your loan term.

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

  • Home price — $250,000
  • Credit score — 740 (excellent)
  • Down payment — 5% ($12,500)
  • Loan — $237,500 30-year fixed rate mortgage
  • PMI cost — $103 per month

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.

PMI versus FHA MIP

It is important to note the difference between PMI (private mortgage insurance) and MIP (mortgage insurance premium).

  • PMI (private mortgage insurance) is applied to conventional loans. It can be cancelled at 80% LTV, or removed automatically at 78% LTV
  • MIP (mortgage insurance premium) is applied to FHA loans. It cannot be cancelled, and will not be removed automatically — unless the homeowner bought with more than 10% down and paid MIP for a full 11 years

The strategies above will help you avoid FHA MIP as well as private mortgage insurance if you’re buying with a small down payment.

However, the strategies below — for cancelling mortgage insurance — only work with PMI on conventional loans.

If you are a homeowner with an FHA loan, and you pay for mortgage insurance premium (MIP) your only way out of it is to refinance into a conventional loan once your mortgage reaches 80% LTV.

You can read more about how to remove MIP here.

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.

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.

Using 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.

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
  • Aminimum 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.

However, the lender will not contact you when you are eligible for PMI cancellation. You will have to contact your lender.

Check your no-PMI loan options

There are plenty of ways for a creative home buyer to get around mortgage insurance.

If you want to avoid PMI but don’t have 20% down, talk to a few lenders about your options.

Chances are, you can get away without PMI and still have a reasonable payment thanks to today’s ultra-low mortgage rates.

Verify your new rate (Sep 24th, 2020)

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