How to Get a Loan Without Private Mortgage Insurance (PMI)
Calculate your “Loan to Value” ratio., Make the largest down payment you can afford., Determine your loan., Use an online loan calculator.
Step-by-Step Guide
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Step 1: Calculate your “Loan to Value” ratio.
The Loan to Value ratio, sometimes abbreviated LTV, is the ratio that measures the amount of the loan compared to the value of the house.
To avoid PMI, for most loans, the LTV needs to be 80% or less.
Calculating the LTV is a simple matter of dividing the amount of the loan (the amount you need to borrow) by the price of the house.
Suppose a couple wants to buy a home priced at $200,000, and they have $20,000 in savings.
They need to borrow the remaining $180,000, so the LTV is 180,000/200,000 =
0.90 or 90%.
Suppose someone else wants to buy a home priced at $100,000, but that person has the same $20,000 in savings.
The loan this time is $80,000, so the LTV is 80,000/110,000 = .80 or 80%. -
Step 2: Make the largest down payment you can afford.
Paying PMI has been described as “giving money away,”so you should try to avoid it if you can.
You can do this by making a large enough down payment.
Generally, to avoid PMI, you need to have a down payment of 20% of the purchase price of the house.Banks may offer deals that look attractive to first-time home buyers because they allow low down payments.
However, the additional PMI payments can become excessive.You should usually try to make as large a down payment as possible.
If you know that buying a home is in your future, it is important to start saving early.
Consider borrowing from family members or other sources, if possible. , Figure out what you can afford to borrow, based on your savings.
A simple calculation, based on what you have saved, can help determine your maximum loan for an LTV of less than 80%.
Start with the amount of the down payment you can afford.
Multiply by
4.
This will tell you how much you can afford to borrow.
Adding together that amount and the amount of your down payment will tell you the purchase price that you can afford.
For example, consider a couple who have saved $30,000 and want to buy a house without paying PMI. $30,000 x 4 = $120,000, which is the amount of the loan they can afford.
Adding together $30,000+$120,000 = $150,000, which is the highest price for a house that they can afford without paying PMI.
Suppose another couple has $50,000 available for a down payment and wants to avoid PMI. $50,000 x 4 = $200,000, which is the amount of the loan they can afford.
Adding together $50,000+$200,000 = $250,000, which is the highest price of the house that this couple can afford without paying PMI. , The above examples provide very simple estimates of your borrowing ability.
For more precise calculations, which take into account the interest rate and duration of the loan, several loan calculator programs are readily available online. -
Step 3: Determine your loan.
-
Step 4: Use an online loan calculator.
Detailed Guide
The Loan to Value ratio, sometimes abbreviated LTV, is the ratio that measures the amount of the loan compared to the value of the house.
To avoid PMI, for most loans, the LTV needs to be 80% or less.
Calculating the LTV is a simple matter of dividing the amount of the loan (the amount you need to borrow) by the price of the house.
Suppose a couple wants to buy a home priced at $200,000, and they have $20,000 in savings.
They need to borrow the remaining $180,000, so the LTV is 180,000/200,000 =
0.90 or 90%.
Suppose someone else wants to buy a home priced at $100,000, but that person has the same $20,000 in savings.
The loan this time is $80,000, so the LTV is 80,000/110,000 = .80 or 80%.
Paying PMI has been described as “giving money away,”so you should try to avoid it if you can.
You can do this by making a large enough down payment.
Generally, to avoid PMI, you need to have a down payment of 20% of the purchase price of the house.Banks may offer deals that look attractive to first-time home buyers because they allow low down payments.
However, the additional PMI payments can become excessive.You should usually try to make as large a down payment as possible.
If you know that buying a home is in your future, it is important to start saving early.
Consider borrowing from family members or other sources, if possible. , Figure out what you can afford to borrow, based on your savings.
A simple calculation, based on what you have saved, can help determine your maximum loan for an LTV of less than 80%.
Start with the amount of the down payment you can afford.
Multiply by
4.
This will tell you how much you can afford to borrow.
Adding together that amount and the amount of your down payment will tell you the purchase price that you can afford.
For example, consider a couple who have saved $30,000 and want to buy a house without paying PMI. $30,000 x 4 = $120,000, which is the amount of the loan they can afford.
Adding together $30,000+$120,000 = $150,000, which is the highest price for a house that they can afford without paying PMI.
Suppose another couple has $50,000 available for a down payment and wants to avoid PMI. $50,000 x 4 = $200,000, which is the amount of the loan they can afford.
Adding together $50,000+$200,000 = $250,000, which is the highest price of the house that this couple can afford without paying PMI. , The above examples provide very simple estimates of your borrowing ability.
For more precise calculations, which take into account the interest rate and duration of the loan, several loan calculator programs are readily available online.
About the Author
Debra Fox
Committed to making cooking accessible and understandable for everyone.
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