How can I avoid paying private mortgage insurance (PMI)?

By Jean Folger AAA
A:

Private mortgage insurance (PMI) is an insurance policy that protects lenders from the risk of default and foreclosure, and allows buyers who cannot make a significant down payment (or those who choose to not to) to obtain mortgage financing at affordable rates. If you purchase a home and put down less than 20%, your lender will probably minimize its risk by requiring you to buy insurance from a PMI company prior to signing off on the loan.

One way to avoid paying PMI is to make a down payment that is equal to at least 20% of the purchase price of the home. If your new home costs $180,000, for example, you would need to put down at least $36,000 to avoid paying PMI. While that's the simplest way to avoid PMI, a down payment that size may not be feasible.

Another option for qualified borrowers is a piggyback mortgage. In this situation, a second mortgage or home equity loan is taken out at the same time as the first mortgage. With an "80-10-10" piggyback mortgage, for example, 80% of the purchase price is covered by the first mortgage, 10% is covered by the second loan, and the final 10% is covered by your down payment. This lowers the loan-to-value (LTV) of the first mortgage to under 80%, eliminating the need for PMI. For example, if your new home costs $180,000, your first mortgage would be $144,000, the second mortgage would be $18,000, and your down payment would be $18,000.

A final option is lender-paid mortgage insurance (LMPI) where the cost of the PMI is included in the mortgage interest rate for the life of the loan. Therefore, you may end up paying more in interest over the life of the loan.

RELATED FAQS

  1. What can capitalization rate tell investors about real estate bubbles?

    Learn about capitalization rates and what information investors may glean from them with regard to bubbles. Explore how rates ...
  2. Are any arm's-length transactions disadvantageous to both parties?

    Find out why arm's-length transactions are disadvantageous when the interests of the two parties coincide and they wish to ...
  3. Are APRs different in different countries?

    Learn about the term APR and how it is used in the United States and other countries. Explore why different lenders charge ...
  4. What loans do and don't have an APR?

    Learn about what annual percentage rates (APR) are and what they mean. Explore different fixed and variable APRs charge by ...
RELATED TERMS
  1. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  2. Lender-Paid Private Mortgage Insurance

    Private mortgage insurance that a mortgage lender pays on behalf ...
  3. Bare Walls Coverage

    A type of insurance coverage that applies to communally used ...
  4. Contents Rate

    The premium required to insure the contents of a property rather ...
  5. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  6. Commercial Real Estate Loan

    definition of a commercial real estate loan

You May Also Like

Related Articles
  1. Home & Auto

    How To Get Rid Of Private Mortgage Insurance

  2. Home & Auto

    6 Reasons To Avoid Private Mortgage ...

  3. Home & Auto

    How To Outsmart Private Mortgage Insurance

  4. Stock Analysis

    Why REITs Remain A Great Place To Put ...

  5. Credit & Loans

    Buying A House? Avoid These 7 Mistakes

Trading Center