How Do I Avoid Private Mortgage Insurance (PMI)?
What is PMI?
Private Mortgage Insurance (PMI) exists to protect lenders from losing the full amount of a loan in the event of a borrower default. Private Mortgage insurance is required for borrowers who cannot pay 20% down on a conventional loan. Mortgage Insurance is paid monthly in addition to the mortgage payment and typically costs between .5%-1% of the loan amount annually. Due to the high cost associated with PMI, every home buyer can benefit from trying to avoid this unnecessary expense.
How Do I Avoid PMI?
1. New 1% Down Conventional Loan with No PMI
We are pleased to introduce our new 1%, 3% or 5% down payment loan programs with no PMI. We offer conventional, 30-year fixed rate loans with NO PMI when you pay 1%, 3% or 5% down. All of these programs have very competitive mortgage rates. In fact, our 5% down program has comparable rates to conventional mortgages. In programs where you put down less than 5%, the rate will increase slightly over the standard 30- or 15-year conventional mortgage. For example, the 1% down program has rates approximately 0.5% higher than comparable conventional mortgage rates.
2. Put Down 20%
The most common way to avoid PMI is to pay 20% or more of the home’s value upfront when purchasing a new property. However, we understand that a 20% down payment is out of reach for many. That’s why we created a number of programs with low down payment requirements AND No PMI.
3. Get a Second Lien
You can use also use a second lien to avoid a PMI loan. To make this work, you get a primary loan for 80% of the value and a second loan for the remainder of the purchase price. Second loans have a slightly higher rate than conventional, first loans, but the interest is generally tax deductible. This is a great, tax-friendly alternative for avoiding PMI.
4. Pay an upfront fee to avoid PMI – Borrower Paid PMI
Another way to avoid PMI is to pay an upfront fee. This is generally the least preferred option but is reasonable to consider if you are in a flat to down market where you can pay higher closing costs. We only recommend you use this PMI alternative if you expect that your house will not appreciate to 20% equity in the foreseeable future and you want to pay an upfront fee to “buy out” the PMI. If this sounds like your current market environment, learn more about Borrower Paid PMI.
4. Lender Paid PMI
Another way to avoid PMI is by accepting a higher interest rate. This is sometimes referred to as ‘Lender-Paid’ PMI or ‘Financed Mortgage Insurance’. While Lender Paid PMI is a great deal for the lender, we almost never recommend this option to our customers. With this option, the homebuyer is stuck with the higher interest rate for the life of the loan. This is a bad deal in comparison to a normal loan with PMI where the lender is required to remove the mortgage insurance once you have 20% equity in your home. The 20% equity requirement takes into consideration any appreciation in your home’s value and your payments toward the loan balance. Click here to read more of our advice on whether it is ever a good idea to get a loan with private mortgage insurance (PMI).
5. Veterans Only: Get a VA Loan or, in Texas, a Texas Vet Loan
If you are a military veteran or active duty military, you can avoid mortgage insurance by obtaining a VA loan or Texas Vet Loan. These loans do not require PMI, have low closing costs, and carry low interest rates. With a VA loan, you can borrow up to 100% of the value of the home – which means no down payment is required.
6. Buy a Home in a Rural Area
If you purchase a home in certain rural areas, you can get a USDA loan. USDA loans do not require PMI. USDA loans are also attractive because you can borrow up to 100% – which means no down payment is required..
If you would like help getting a No PMI loan, contact us today.