How To Avoid Paying Private Mortgage Insurance (PMI)

June 29th, 2017
With 17 years in mortgage banking, Craig Berry has helped thousands achieve their home ownership goals. Craig has helped 1,000s of homeowners get rid of and avoid private mortgage insurance.

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.

Click here to connect with an LPMI lender.

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.

Click here to find a knowledgeable lender with the best rates.

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 Example

Home 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.

DICTIONARY

FHA Loan

A loan backed by the Federal Housing Administration and offered by lenders. It requires just 3.5% down and lower credit scores are okay.

DICTIONARY

Mortgage Default

Default is the failure to pay interest or principal on a loan or security when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment.

DICTIONARY

FHA MIP

FHA MIP is short for mortgage insurance premium and is FHA's "brand" of mortgage insurance. Homeowners pay an upfront and monthly fee for FHA loans.

DICTIONARY

Basis Points

Another way of referring to fractions of a percent. Each basis point equals one 100th of one percent, or .01%.

DICTIONARY

Principal Balance

The amount owed on a loan. Every monthly mortgage payment reduces the principal balance. Eventually, the loan is repaid, and the principal balance drops to zero. This process is called “amortization.”

DICTIONARY

Second Mortgage

An additional mortgage secured by the home. Second mortgages can be home equity loans or lines of credit. They are also called “junior liens,” because if the borrower defaults and the property is foreclosed and sold, the lender with the first mortgage gets repaid first. The second mortgage lender only gets repaid if there is enough money from the foreclosure sale. That’s why second mortgages are riskier for lenders and carry higher interest rates.

DICTIONARY

Loan-To-Value (LTV)

The relationship between the property value and the amount owed against it. The L:TV equals the amount owed, divided by the property value. So if you owe $150,000 against a house worth $200,000, your LTV = $150,000 / $200,000. That’s .75, or 75 percent.

How can we help you?
Get a rate quote with and without mortgage insurance
I want to refinance and get rid of PMI
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What loan type is right for me? Check all options that match you or your home.
We Suggest: VA Loan

As a veteran, you’re entitled to the best mortgage available: The VA Purchase loan.

Why the VA Loan?

0% Down Required
Lower rates than traditional options
No mortgage insurance required

Claim My VA Benefit Learn More About VA Loans
We Suggest: USDA Loan

USDA Loans are purpose built to promote home ownership and protect home values in rural areas.

Why the USDA Loan?

0% down required
Modular & manufactured homes may be eligible
Favorable income and credit requirememnts

Check USDA Eligibilty Learn More About USDA Loans
We Suggest: FHA Loan

FHA loans are very popular because of their low down payment requirements, lean credit and income requirements and expansive availability.

Why an FHA Loan?

Low down payment requirements
High loan limits in expensive neighborhoods
Lax credit and income requirements

Check FHA Eligibilty Learn More About FHA Loans
We Suggest: Conventional Loan

Conventional loans come in very different shapes and sizes, but usually require good to excellent credit and higher down payments. In return, they are generally cheaper and more flexible.

Why a Conventional Loan?

Down payment requirements between 3% and 20%
Faster closing
'Preferred' method by most home sellers
Higher income and credit requirements but lower rates

Check My Conventional Rate Learn More About Conventional Loans
We Suggest: Conventional Loan

Conventional loans come in very different shapes and sizes, but usually require good to excellent credit and higher down payments. In return, they are generally cheaper and more flexible.

Why a Conventional Loan?

Down payment requirements between 3% and 20%
Faster closing
'Preferred' method by most home sellers
Higher income and credit requirements but lower rates

Check My Conventional Rate Learn More About Conventional Loans
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