How to Avoid Mortgage Insurance
Calculate your loan-to-value ratio., Get a piggyback mortgage., Get a second appraisal., Pay a higher down payment., Prepay on your loan.
Step-by-Step Guide
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Step 1: Calculate your loan-to-value ratio.
Your lender typically will look at your loan-to-value ratio to determine whether to require PMI on your mortgage.PMI insures the lender, not you – although you pay the premiums.
The insurance protects the lender by providing a partial reimbursement of its investment if you default on your loan.Typically lenders require PMI if you make a down payment that is less than 20 percent of your home's value, which means you're asking the lender to finance more than 80 percent of the home's price.For example, if your home costs $250,000 and you have a down payment of $50,000, your down payment is 20 percent and lenders typically won't require you to pay PMI.
However, if you can only afford a down payment of $20,000, this means you're asking the lender to finance 92 percent of the purchase price.
In that case, most lenders would require you to pay PMI.
If you have poor credit or are otherwise considered a high-risk borrower, lenders may require PMI even if you have a larger down payment.
Some ways you may be considered high risk include a history of unsteady income or recent foreclosures. -
Step 2: Get a piggyback mortgage.
You may be able to avoid mortgage insurance by using a second mortgage to make a larger down payment on your house.
A piggyback mortgage typically is taken out at the same time as the original mortgage.
The first mortgage covers 80 percent of your purchase price, while the second, or piggyback, mortgage covers the other 10 percent, enabling you to make a 10 percent downpayment.Some piggyback mortgages also follow an 80-5-15 split, where your first mortgage is for 80 percent while the second is for 5 percent and you make a 15 percent downpayment.Keeping the loan-to-value ratio of the first mortgage at under 80 percent usually eliminates that lender's need for PMI.In some cases, you may be able to avoid PMI this way and also deduct the interest from both loans on your taxes.
However, keep in mind that some piggy-back loans may have shorter terms or adjustable interest rates., Some lenders are willing to consider a second appraisal when assessing the value of your home to determine whether PMI is necessary.
You typically must pay between $300 and $500 to get an appraisal.However, since you may pay anywhere from $50 to $200 a month or more for PMI, the one-time cost potentially could save you thousands.Before you get the house re-appraised, find out from your lender if they would be willing to accept your second appraisal of your house when calculating your loan-to-value ratio. , Lenders typically don't require PMI if you're making a down payment that is greater than 20 percent of the home's value.While this is the easiest way to avoid paying PMI, it often isn't feasible.
While some home buyers simply want to make a lower down payment, most people choose a lower down payment because they can't afford to pay more., If you can't make a higher downpayment, consider making additional payments on your loan to more quickly decrease your loan balance in relation to your home's value.
Lenders are required by law to tell you how long it will take to pay down your loan sufficiently that you can request a cancellation of the PMI.
You can accelerate that time frame by making additional payments on your mortgage. -
Step 3: Get a second appraisal.
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Step 4: Pay a higher down payment.
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Step 5: Prepay on your loan.
Detailed Guide
Your lender typically will look at your loan-to-value ratio to determine whether to require PMI on your mortgage.PMI insures the lender, not you – although you pay the premiums.
The insurance protects the lender by providing a partial reimbursement of its investment if you default on your loan.Typically lenders require PMI if you make a down payment that is less than 20 percent of your home's value, which means you're asking the lender to finance more than 80 percent of the home's price.For example, if your home costs $250,000 and you have a down payment of $50,000, your down payment is 20 percent and lenders typically won't require you to pay PMI.
However, if you can only afford a down payment of $20,000, this means you're asking the lender to finance 92 percent of the purchase price.
In that case, most lenders would require you to pay PMI.
If you have poor credit or are otherwise considered a high-risk borrower, lenders may require PMI even if you have a larger down payment.
Some ways you may be considered high risk include a history of unsteady income or recent foreclosures.
You may be able to avoid mortgage insurance by using a second mortgage to make a larger down payment on your house.
A piggyback mortgage typically is taken out at the same time as the original mortgage.
The first mortgage covers 80 percent of your purchase price, while the second, or piggyback, mortgage covers the other 10 percent, enabling you to make a 10 percent downpayment.Some piggyback mortgages also follow an 80-5-15 split, where your first mortgage is for 80 percent while the second is for 5 percent and you make a 15 percent downpayment.Keeping the loan-to-value ratio of the first mortgage at under 80 percent usually eliminates that lender's need for PMI.In some cases, you may be able to avoid PMI this way and also deduct the interest from both loans on your taxes.
However, keep in mind that some piggy-back loans may have shorter terms or adjustable interest rates., Some lenders are willing to consider a second appraisal when assessing the value of your home to determine whether PMI is necessary.
You typically must pay between $300 and $500 to get an appraisal.However, since you may pay anywhere from $50 to $200 a month or more for PMI, the one-time cost potentially could save you thousands.Before you get the house re-appraised, find out from your lender if they would be willing to accept your second appraisal of your house when calculating your loan-to-value ratio. , Lenders typically don't require PMI if you're making a down payment that is greater than 20 percent of the home's value.While this is the easiest way to avoid paying PMI, it often isn't feasible.
While some home buyers simply want to make a lower down payment, most people choose a lower down payment because they can't afford to pay more., If you can't make a higher downpayment, consider making additional payments on your loan to more quickly decrease your loan balance in relation to your home's value.
Lenders are required by law to tell you how long it will take to pay down your loan sufficiently that you can request a cancellation of the PMI.
You can accelerate that time frame by making additional payments on your mortgage.
About the Author
Natalie Gutierrez
Specializes in breaking down complex home improvement topics into simple steps.
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