How to avoid PMI when buying a home

Usually, when your equity tops 20%, you no longer have to pay PMI.

How to avoid PMI when buying a home

Private Mortgage Insurance (PMI) is an insurance policy that protects the lender against the borrower’s default of the loan. The mortgage lender will be allowed to take out to cover a portion of the amount borrowed for security against default on the loan.

That means that if the borrower stops paying on the mortgagee and the lender makes a foreclosure on the mortgaged property and suffers a loss, he will be indemnified by the insurance company.

However, though the lender is being protected, the borrower is the one to pay the premiums. Therefore, PMI is an extra cost on the mortgage and in the pocket of the borrower

Typically, borrowers are mandated to pay for PMI if, on a conventional mortgage, their down payment is less than 20 percent. So, usually, when your equity tops 20%, you no longer have to pay PMI. However, eliminating PMI is not easy. Many lenders insist on processes that take up to several months within which PMI still has to be paid.

How do you avoid PMI?

  1. Make a 20% down payment

The first way to avoid PMI is to make a down payment of at least 20 percent. A larger down payment than 20 percent offers advantages beyond avoiding PMI, however, to avoid PMI, all you need is a down payment of 20%.

  1. Get a VA loan

This applies to only Military members or veterans and their eligible spouses. If you are one, you may take advantage of the VA loans backed by the Department of Veterans Affairs. These loans do not require mortgage insurance, except a one-time funding fee.

  1. Consider state housing finance agency programs

State housing finance agencies give qualified people mortgage and down payment assistance programs. Many times, the programs can include low-down-payment mortgages including reduced-cost mortgage insurance or mortgages requiring no PMI.

  1. Pay a Higher Interest Rate Instead of PMI

This is also an option if you still want to explore the traditional mortgage. You may ask for the lender-paid mortgage insurance. This means that the insurance will be paid by your lender. However, to cover what ought to be an additional insurance premium, your loan would have a higher interest. Invariably, the borrower pays a lot more interest over time. This is basically the lender passing the cost of PMI to them.

This is the reason this strategy is not embraced by many borrowers. Depending on how long your loan repayment runs, you may end up paying a lot of money.

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Harish is the editor at howto Finance. Here we publish high quality trending news topics on Business, Finance, Loans and Credit-Cards etc. Our editorial includes worldwide topics.

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