by: Corey Schwartz

Everything you ever wanted to know about Mortgage Insurance but was afraid to ask.

What is PMI?

PMI stands for private mortgage insurance. It is an insurance premium that is typically required on loans that are more than 80% loan to value. Mortgage loans with less than 20% equity are considered riskier for lenders. PMI is designed to protect lenders in the event that a mortgage loan goes into default or foreclosure.

Facts About Private Mortgage Insurance:
• The insurance premium is dictated by a number of factors including downpayment amount, loan amount & credit score.
• The average PMI premium is between .3%- 1.5% of the loan amount annually.
• The guidelines to remove PMI from your loan vary by lender and loan type. All require an appraisal to demonstrate that the principal balance is less than 80% loan to value, and some loans require refinancing into a new loan altogether.
• New regulations were passed on FHA loans stating that PMI must be paid for the entire loan, even after the balance goes below 80% loan to value, unless the loan is refinanced.

Reasons to Avoid PMI

1. Cost: The average PMI premium is 1% of the loan balance per year. That means for every $100,000, buyers pay $1,000 annually or $83.33 per month. With the average home price in America being over $200,000 means that private mortgage insurance premiums can be a few hundred dollars each month.
2. Less Mortgage: Home buyers will be qualified for a lower mortgage amount. Lenders only go up to a certain debt to income ratio. Your PMI premium increases your monthly expenses and therefore lowers the mortgage payment you can afford.
3. Tax Deductions: Private mortgage insurance premiums are only tax deductible if your household income is less than $110,000 for married couples or $55,000 for filing single.
4. No Beneficiary: Unlike other insurance plans, there are no beneficiaries associated with private mortgage insurance. In the event of death, the premiums you have paid do not get passed down to heirs.
5. Difficult to Cancel: Getting rid of private mortgage insurance can be a lengthy and costly process. All lenders require an appraisal to ensure to the accurate valuation of the home. The average full appraisal costs about $500. In addition to an appraisal, some loans may need to be refinanced all together which means several thousand dollars in closing costs and may also result in a higher interest rate.

How to Avoid PMI

The most commonly known way to avoid private mortgage insurance is to make a down payment of 20%. However, as home values have continually risen it has become increasingly difficult to save a large sum of money for a 20% down payment. If first-time home buyers had to save 20% down payments, it would push off their opportunity to buy a house for several years. This would also negatively impact our economy that depends on first-time homebuyers consistently entering the real estate market.

The good news is that it is no longer necessary to save such a large down payment to avoid private mortgage insurance. Various lenders have seen the benefits of offering low down payment loans that do not require any private mortgage insurance. Use one of the strategies below to avoid PMI without making a 20% down payment.

Get an 80/20 loan.

One of the first options to avoid private mortgage insurance without making a downpayment of 20% is to get an 80/20 loan. This means you’d take out two separate mortgage loans. Your first mortgage would go up to 80% loan to value and be the primary mortgage on the home. The second mortgage

Advantages of an 80/20 loan:
– You can avoid PMI.
– Both loans use your property as collateral making the overall interest paid lower.
– Payments on both loans may still be lower than a payment on a mortgage with PMI.
– Don’t have to make a downpayment.

Disadvantages of an 80/20 loan:
– You are making two payments on your home.
– Closing costs may be higher since you are closing on two separate loans.

As the value of your home increases and your mortgage balances decrease you can refinance your home into one mortgage. Although there are some drawbacks to an 80/20 loan, you may still find it more beneficial than getting a loan with PMI or waiting several years to buy a home.

Qualifying Loan Programs

There are a few qualifying loan programs that do not require any down payment or private mortgage insurance. The most commonly known loan programs are USDA and VA loans. They each have their own specific eligibility requirements. For USDA loans the property must be located in a specific rural area designated by the government and the household income must meet the required guidelines. VA loans are designed for active duty military and veterans.

Most special loan programs do have a funding fee associated with the loan. The funding fee is paid at the time of closing. It is a percentage of the loan amount and averages around 2.5%. Most loan programs allow the funding fee to be added to the loan balance, so home buyers do not have to pay out of pocket.

Advantages of Qualifying Loan Programs
– Make no downpayment or a very small downpayment.
– Avoid PMI.
– Have competitively low interest rates.

Disadvantages of Qualifying Loan Programs
– Have to pay a funding fee.
– Must meet eligibility requirements.

Opt for a Higher Interest Rate

Many lenders are now offering private loans that do not require a 20% downpayment or private mortgage insurance. Most often these loans are not sold on the secondary market and are serviced in house. Lenders typically require 3-5% down payment, but that is comparable to an FHA loan that requires PMI. The interest rate on these loans are typically .5% more than other loans requiring PMI. However, the increase in interest rate is worth the opportunity to purchase a home without a substantial down payment while avoiding PMI.

Advantages of Higher Interest Rate Loan
– Don’t have to make a 20% downpayment.
– Don’t have to pay a funding fee associated with a qualifying loan program.
– Don’t have to meet eligibility of qualifying loan programs.
– Avoid PMI.

Disadvantages of Higher Interest Rate Loan
– The interest rate remains higher through the life of the loan, even after the loan to value is below 80%.
– Must save 3-5% for a downpayment.
– Less lenders to choose from.

Getting a Loan with Private Mortgage Insurance
If you cannot find a mortgage that suits your needs without PMI don’t be disheartened. While no one wants to pay the extra insurance you can find affordable premiums. It may be worth it to pay PMI for a few years instead of paying rent. Look at private mortgage insurance as part of the investment you are making into homeownership. Instead of waiting to save thousands of dollars for a downpayment, you can be paying on your mortgage and increasing your equity in a property.

Use a Great Mortgage Professional

The best way to avoid private mortgage insurance is to utilize the expertise of your mortgage professional. Our loan officers have the industry knowledge that is up to date. They know what loans offer you the best value and what criteria you need to fit those guidelines.

Loanatik has mortgage experts that are waiting to assist you in finding the perfect mortgage. We have access to a variety of mortgage products and will find the most affordable option for you. Contact a loan officer at Loanatik today to see what loans best suit your specific needs.

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