Whatever You Do, Avoid Private Mortgage Insurance!

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When you want to purchase a home, there are some things that you really ought to understand about mortgage loans and the fees associated with them. For example, sometimes when home buyers do not have at least 20 percent down or their credit score is below a certain amount, they are more apt to have to pay private mortgage insurance.  This type of insurance will cost you 1.5 percent of the loan at closing and an additional 0.5 to 1 percent annual fee. That might not seem like a lot of money, but it adds up quite quickly.

For example, if your loan amount is $200,000 and your PMI is 1%, you will have to pay $2,000 a year to the lender. That means approximately $167 a month is going out the window for this easily avoidable insurance.

Yes, PMI does allow individuals who have less than 20% down payment to actually purchase a home, but can you avoid it? Is there a way? After all, no one wants extra fees tagged onto their monthly mortgage payment, so how can you avoid private mortgage insurance? Experts state that there are several ways to avoid such payments.

Loan-to-value ratio

Loan-to-value ratio is the ratio of the loan in comparison with the appraised value of the home.  If you want to avoid private mortgage insurance, be sure that the ratio of the home is less than 80%. A great way to accomplish this when you don’t actually have 20% cash lying around for a down payment is to do a piggyback loan. What this means is that on your first loan, you borrow the 80% that you need and on the second loan, you take out 10% of the appraisal value.  Since that only equals 90% of the total loan value, you must come up with the remaining 10%.  Others call this the 80/10/10 mortgage. Be aware though that one drawback of such a loan is that the second loan’s interest rate is usually much higher than the first one.

Utilize the Homeowner’s Protection Act of 1998

If you’re not familiar with Homeowner’s Protection Act of 1998, sometimes referred to as the PMI Act, it is simply guidelines for when a homeowner has accumulated a certain amount of equity to cancel their PMI.  It generally is acceptable when the buyer’s equity level gets to 22% of the original home value and mortgage payments are up to date.  Keep in mind that as a buyer, you can ask your lender to cancel your PMI when your equity reaches 20% and you meet their other requirements. Check with your lender for the requirements.

Add mortgage insurance to interest rate

You can also have your private mortgage insurance added to your interest rate, which isn’t really saving you money in the long run because your interest rate is higher, but you don’t have to make separate payments.

Final thought

As a home buyer, you want to do all you can to avoid PMI, as it does nothing to benefit you.  You can even seek a less expensive home so you can come up with the 20% down and avoid PMI. The tradeoff may be worth it in the long run.

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