If you’re getting a mortgage to buy your first home, then you’re going to have to navigate the minefield that is getting a mortgage. Depending on the size of your down payment as well as your history of taking out and paying back debt, your lender may try to force you to get a private mortgage insurance policy before approving your mortgage. Private mortgage insurance (PMI) will just make your mortgage more expensive for as long as the policy lasts, and PMI does not exist to protect homeowners. A PMI policy on your mortgage will only benefit the lender if you fail to make mortgage payments, but you can still be a victim of foreclosure.
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How To Avoid PMI
The best thing to do when taking out a mortgage on your new home is to avoid PMI altogether. Remember that lenders will require a PMI policy when they think that a borrower may have trouble meeting their repayment obligations later on down the line. The best way to avoid PMI is to show that you are not a risky borrower in the first place. There are a few ways to do this:
Wait Until You Can Pay 20 Percent Down
The hardest cutoff that lenders will use when determining whether or not to require PMI is the size of your down payment. By making a downpayment of 20 percent of the house’s value or more, you can avoid PMI from the very beginning. Lenders are forbidden by law to attach a PMI policy to your mortgage as long as your loan balance is less than or equal to 78 percent of the home’s value. Traditionally, however, many lenders will use a 20 percent down payment as a cutoff.
If you’re close to a 20 percent down payment on your dream home, it might be a good idea to maximize your savings until you can afford to pay that full 20 percent down. You’ll end up saving money in the long run by avoiding mortgage insurance. Alternatively, you can always try to negotiate the price down, or simply make a bid on a house for which you can afford the 20 percent down.
Qualify for Government-Backed Mortgage
Not all mortgages are completely private. If you are in a certain economic or regional situation or you are a veteran or servicemember, you may qualify for certain government-backed mortgages. These mortgages are guaranteed by the federal government, rather than a private insurance company. For this reason, you can avoid PMI on a government-backed mortgages, however, there may be additional fees to make up for the lack of PMI, so be sure to consider the loan offer carefully. Here are some government-backed mortgages that can help you to avoid PMI:
- VA Home Loans: The Department of Veterans Affairs exists to help military veterans return seamlessly to civilian life. They offer home loans specifically for veterans with special repayment terms to acknowledge the sacrifices of servicemembers. VA Home Loans don’t come with a PMI policy, but there is an upfront fee that every borrower must pay to mitigate the effects of veterans who default on their loans.
- FHA Home Loans: The Federal Housing Administration offers home loans with low down payments, so it’s possible to avoid PMI without making a large down payment of 20 percent or more. However, since FHA Home Loans are insured by the government, you will still be required to make a regular payment to insure against the possibility of default on your loan.
- USDA Home Loans: Home loans from the Department of Agriculture are desirable for their low down payment requirements and low interest rates. However, like FHA loans, they are insured through the federal government, so you can expect to pay a fee in place of a PMI premium.
Use a Second Mortgage or a Piggyback Loan
Another way to avoid PMI is to use two mortgages to buy your home. The value of the your first mortgage is limited to 80 percent of the value of your home, effectively keeping you within the 20 percent down payment limit to avoid PMI. You can use the second mortgage to make up the difference between the down payment that you can afford and the 20 percent mark that’s required to avoid a PMI policy.
Get Lender-Paid Mortgage Insurance
Sometimes the lender will pick up the bill for PMI, rather than pinning it on you. However, this doesn’t necessarily mean you’re getting off the hook when it comes to PMI premiums. Even if the lender is the one signing the checks to the mortgage insurance company, they can still pass on the cost to you in the form of fees or higher mortgage interest rates. It’s important to look before you leap if you plan to avoid PMI by getting a mortgage with lender-paid insurance.
How to Get Rid of PMI
You can’t always avoid mortgage insurance right out of the gate, so sometimes the best thing to do is to go ahead with the PMI policy that your lender wants with a plan to get out of it as soon as possible.
Know the Rules for PMI Removal
As soon as the total balance on your mortgage is 80 percent or below the original value of your home, you have the right to request that your PMI policy be removed from your mortgage. In order to make your request, there are a few rules that you must know:
- PMI removal requests must be made in writing.
- You must have a consistent history of on-time mortgage payments.
- There can be no liens on the home besides that of your mortgage lender.
- Your lender may require proof that the value of the home hasn’t fallen below its original value. Usually this will come in the form of an appraisal.
Although you gain the right to request PMI removal once your mortgage reaches 80 percent of your home’s original value, your PMI policy will automatically be removed from your mortgage once is reaches 78 percent of your home’s original value.
Refinance Your Mortgage
One way to try to get rid of mortgage insurance is simply to get a new mortgage. You can try your luck by refinancing to see if PMI is included on the new mortgage. This trick is most valuable when your home has appreciated in value since you bought it. This is because a refinanced mortgage may fall below the 80 percent threshold on the new value of the home, while the old mortgage was above that threshold.
Get a New Appraisal
Once again, if your home has gained value since you first took our your mortgage, a new appraisal that reflects the updated value can help you get out of your PMI policy. As long as your mortgage balance is 80 percent or less of the home’s value according to your new appraisal, you can request PMI removal. However, keep in mind that you will still need to pay the appraiser’s fee, so this option is only a net win if you’re confident that the home’s new value will help you get rid of PMI.
Pay Off Your Mortgage Faster
Whether you’ve gotten a promotion at work or you’ve hit a sudden windfall, an extra injection of cash can help you make larger mortgage payments month over month. Paying off your mortgage faster means that you’ll be able to cross the 20 percent threshold more quickly. Additional mortgage payments also help to support your claim to a reliable payment history when you submit your written request for PMI removal.
Increase Your Home’s Value
Sometimes your home’s value won’t appreciate quickly enough on its own. Although things like infrastructure and population growth often contribute to a property’s value, there are ways to take appreciation into your own hands. By remodeling or making renovations to your home, you can help your house grow in value more quickly so that you can get a new appraisal and reach the 20 percent threshold on your mortgage. However, be sure to include the cost of these changes in your calculations. Are you saving money in the long run by trading renovation costs with PMI premiums?
Buying a house is already expensive enough and a costly PMI policy only makes it worse. Try to avoid PMI from the very beginning if possible. If you can’t do that, find out how to get rid of PMI on your mortgage as quickly as you can.
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