Private mortgage insurance (PMI) adds costs to the monthly mortgage payment. This insurance plan seeks to protect a lender from the risks of default as well as foreclosure. Furthermore, the PMI allows insurance buyers who are unwilling to pay a large down payment or cannot afford to pay a significant payment, to obtain mortgage finance at affordable rates.
Purchasers of homes who put down 20% or less will be required by their lenders to minimize the risks by buying insurance from a private mortgage insurance (PMI) company before signing off on their loans. If you seek to avoid paying PMI, there are several things that you can potentially do.
1. Make a larger down payment
One of the most effective ways of avoiding the payment of PMI is to make a large down payment. Make a down payment that is equal to at least 20% of the property’s value. For example if your new house costs $180,000 you would need to put down a down payment of at least $36,000 so as to avoid making payments for the PMI. The bank will be willing to lend 80% of the money you need without the need to insure the loan. While this is the simplest and most effective way of avoiding PMI, a down payment that is substantially large may not be practical. It might prove difficult to save 20% down payment, but nevertheless it allows you to save a large sum of money on the mortgage payments over the years.
2. Get a second mortgage
You can avoid paying PMI by getting another mortgage. The first mortgage you get can be used to cover 80% of the property’s purchase price. Then you can obtain a second smaller mortgage to cover the balance of 20%. Alternatively, the 80-10-10 piggyback mortgage can be applied with 80% being the purchase price covered by the initial mortgage, 10% covered by the second mortgage and 10% covered by the down payment. This lowers the loan to value of the initial mortgage to fewer than 80% and thus eliminating the need for a PMI.
For example, if the new home costs $180,000, your initial mortgage would account for $144,000, the second mortgage would account for $18,000 and the down payment would account for $18,000. This means you will be working with 2 different lenders. Furthermore, you will need to make 2 different mortgage payments using this method. It can prove a little bit confusing and inconvenient when you choose this method, but you will be in a position to save by skipping the payments of PMI every month. Therefore, if you can be able to write 2 checks and keep up with due dates for each loan, you stand to benefit a great deal from this method.
Well, when you take the initiative to shop for a second mortgage, pay close attention to the rate of interest. Most times than not, the rate of interest will be higher with a second mortgage compared with the first mortgage.
3. Find a great deal
Shopping around is likely to fetch you a good deal on a property that allows you to avoid paying PMI. The ‘loan to value’ ratio is often calculated on the home’s actual value and not the purchase price, which means that if a second party is selling a home for a discount, you can potentially purchase it. You will not have to worry about the PMI. For example, if there is a home that is worth $100,000. The owner of the property wants to move out quickly and is willing to sell the property for $80,000. This means you should be able to obtain a primary mortgage for the whole purchase price. The lender is aware that they can sell the property for $100,000 in case you default on paying the loan. As a result, they will not be concerned about you making a $20,000 down paying. Alternatively you will not be called upon to pay PMI every month. Although such deals might be difficult to find, if you take the time to look around, you will be surprised to find that such good deals are around.