Homebuyers who wish to acquire affordable home ownership will usually go for mortgage programs that require a down payment smaller than 20%. While there is nothing wrong with such home loan options, it does have its disadvantages. For one, you’ll need to pay for Private Mortgage Insurance.
Defining Private Mortgage Insurance
Private Mortgage Insurance is a costly type of insurance you’re required to pay when availing conventional mortgages. PMI is not an insurance that aims to protect you as the borrower, but the lender instead in case you fail to repay the loan. If you can’t afford home loan programs that require at least 20% down payment, expect that you’ll have to pay for PMI.
The Silent Benefits of Private Mortgage Insurance
Since PMI is an insurance paid by the mortgage borrower but protects the lender, many views Private Mortgage Insurance as one-sided. However, it does have it’s silent benefits. The following are the reasons why Private Mortgage Insurance can be useful for mortgage borrowers and homebuyers.
- PMI gives you the flexibility to pay an upfront fee that is less than 20%.
- It allows less liquid assets tied up in your new home which is an illiquid investment.
- You can cancel PMI once your loan-to-value ratio reaches 80%.
How To Avoid Private Mortgage Insurance?
There are different ways on how you can avoid having to pay for Private Mortgage Insurance. These are the following.
Qualify for a Veterans Administration Loan
If you are a veteran or is an eligible dependent of such, you can qualify for a Veterans Administration Loan. VA Loan Laredo borrowers don’t need to pay for PMI, plus you get to purchase your dream house without paying any down payment.
Pay a large enough down payment
The primary reason you need to pay for Private Mortgage Insurance is to protect the lender in cases you fail to repay the loan. By spending 20% of the purchase price, you no longer need to pay for PMI.
Use a Piggyback loan
The piggyback option allows you to pay a low down payment to buy a house without PMI. You’ll need to get two separate credit – the first one will pay for 80% of the purchase price while the second will piggyback for the rest of the amount.
Cancel PMI later
Taking a home loan and paying a down payment that is less than 20% of the purchase price means you can’t avoid PMI. However, as time passes by and you’re able to pay off your lender, your LTV decreases. Mortgage borrowers have the right to cancel Private Mortgage Insurance once you paid 80% of your home’s value.
Take advantage of Lender-Paid Mortgage Insurance
LPMI is available for conventional loans borrowers. When you accept a higher interest rate, or you pay a fee upfront once you get your mortgage, your home loan lender will pay for PMI.
PMI can definitely add up to your monthly expenses. By paying 20% down payment, using a piggyback loan, qualifying for a VA loan, taking advantage of LPMI or canceling PMI after paying most of your mortgage, you can dodge the cost Private Mortgage Insurance.