4 Ways to Avoid Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) protects lenders from losses, helping offset the risks of default and foreclosure. That’s great for lenders – but when PMI is required, home loan payments are much higher. The premiums are generally between 0.03 and 1.5 percent of the original mortgage total, and that can add hundreds to the amount due each month.

Clearly, avoiding private mortgage insurance is in your best interests. Here are four ways you can achieve that goal.

Does your home loan require PMI?

Make a 20 Percent Down Payment

Lenders typically require PMI  when the loan-to-value ratio – or the amount you’re borrowing versus the value of the home you’re buying — is above 80 percent. So, if you can put down at least 20 percent of the purchase price, you can avoid private mortgage insurance.

Choose a Government-Insured Loan

Home loans that are backed by the U.S. Department of Veterans Affairs, otherwise known as VA loans, don’t require PMI. Neither do USDA loans, or mortgages from the U.S. Department of Agriculture. But this isn’t the case for all government-insured loans – if you get an FHA loan, backed by the Federal Housing Administration, you’ll have to pay for mortgage insurance.

Go With a Piggyback Mortgage

A piggyback mortgage basically splits the amount you’re borrowing between two separate loans. The first covers 80 percent of the purchase price, which lowers the loan-to-value ratio enough to avoid PMI. A second mortgage or home equity loan covers another 10 percent (or 15 percent), and you put down the remaining 10 percent (or 5 percent). With this approach you will have two monthly payments, but their total may be lower than one home loan with mortgage insurance.

Build PMI Into Your Home Loan

Another option for avoiding PMI is to include the costs in your home loan. This is referred to as lender-paid mortgage insurance (LPMI), and with it, you won’t have a separate PMI payment to worry about. However, the lender may charge you a higher rate in exchange, and you’ll end up paying more in interest over the lifespan of the loan. Your monthly payments may also increase, but the amount due may be less than it would be if you had to pay for PMI.

What’s the right option for you? For expert advice and assistance exploring all of your home loan options, call on the professional team at Intercap Lending.

Our friendly mortgage brokers have extensive expertise assisting home buyers in northern Utah. We can help you crunch the numbers and determine the best way for you to avoid private mortgage insurance. For a free consultation with the Intercap Lending team, contact our Orem office today.