Prospective homeowners who find themselves in need of financing in order to purchase a home are typically compelled to acquire a particular type of insurance, especially if their down payment equals less than 20% of the property’s cost: private mortgage insurance (PMI). This form of insurance carries additional costs and usually needs to be bought before signing off on a mortgage loan. A 2018 report by Moody’s Investor Services revealed total PMI written in the first half of that year in the United States was $138.8 billion, which marked a 14% increase from 2017. In the second quarter alone, $80.3 billion in private mortgage insurance was written up. So, how to avoid paying a private mortgage insurance?
Keeping this in mind, here are some tips to consider if you wish to avoid paying PMI:
How Does PMI Work?
Usually, PMI is only incurred when a homeowner has to finance over 80% of a property’s purchase price. This type of insurance shields lenders from the risk of default and foreclosure. According to Bank of America, the cost of PMI often varies based on down payment and credit score, although it usually falls in the range of 0.3 to 1.5% of the initial loan quantity annually. This expense is in addition to interest you pay on your loan.
Most companies will give you a choice between purchasing PMI up front upon closing or adding the corresponding premium to your monthly payments.
Always Be Sure To Put Down 20% Or More
This point can’t be hammered enough. This is perhaps the simplest way to avoid paying PMI.
Lower Your Loan-to-Value Ratio With 80-10-10 Loans
Also called a “piggyback mortgage,” this type of loan consists in taking out a second mortgage or home equity loan in tandem with your first mortgage. Therefore, the original mortgage takes care of 80% of the home’s purchase price, the second loan covers 10% and the remaining 10% gets covered by the down payment. The original mortgage’s loan-to-value ratio thus drops to less than 80% and PMI becomes unnecessary.
Build Your PMI Into The Interest Rate
Aside from piggyback mortgages, another way to avoid PMI payments is by acquiring lender-paid mortgage insurance (LPMI). With this option, the cost of PMI is built into your mortgage’s interest rate for the loan’s duration. However, it’s important to note that this frequently results in higher interest rates.
One final option to evade PMI involves requesting cancellation of PMI payments after you have formed a minimum equity stake of 20% in your home. The Homeowners Protection Act dictates that lenders must immediately cancel a borrower’s PMI once their mortgage’s LTV ratio falls to 78%, so this is not a bad option to consider.
Borrowers who make low down payments should also weigh the possibility of applying for other types of loans like Federal Housing Administration (FHA) loans, which allow weaker credit scores and down payments as little as 3.5%.
Consult With Mathis To Find The Best Route For You
Speak to the experienced professionals at Mathis Title Company in Fairfax, Virginia, to learn more about which of these options you should pursue in order to avoid paying private mortgage insurance. Mathis serves customers throughout several areas of Northern Virginia, including Alexandria, Arlington, Centreville, Chantilly, Fairfax, and McLean.
Robin Mathis is a highly qualified attorney who was sworn into the U.S. Supreme Court and who boasts more than 35 years of experience. Robin has performed a large number of closings (small commercial and residential) and is familiar with both the buyer and seller sides of the homebuying process.
Mathis Title’s services include the preparation and review of purchase agreements (so that all your rights as a buyer or seller are respected), mechanics liens, refinancing, settlements, and title insurance. With respect to title insurance, Mathis’s professionals will help ensure that you have a clean title that is approved for transfer. Reputable underwriters will then insure your new title via both an owner’s policy and a lender’s policy. This process will help protect you and your lender in the event any issues surface during the ownership transfer process (liens, encumbrances, unpaid taxes, etc.). Call Mathis Title Company today at 703-214-4020 or contact them online to learn more about their services.