As a first-time home buyer, it is easy to get swayed in excitement. Owning a home is the American dream. In the midst of this excitement, you might be signing up for a yearly recurring cost.
This cost is known as private mortgage insurance (PMI). It is one of the costs that can be easily overlooked if you’re clouded by the excitement of becoming a homeowner. For the unprepared homebuyer, the recurring cost of PMI can accumulate fast and become a financial burden.
However, if you prepare, plan and know about private mortgage insurance, you’ll find ways around it so it doesn’t become a financial burden. And what’s more, you can avoid paying PMI.
In this article, you’ll learn about PMI and how you can avoid paying PMI.
What Is Private Mortgage Insurance?
Everyone wants to be a homeowner but not everyone can buy a house without mortgage assistance. Mortgage loans have made it possible for most people to become homeowners. So, how does PMI relate to mortgage loans?
Private mortgage insurance is a cost paid to offer protection to the loan lender. In the advent of a default on a mortgage loan taken, the PMI acts as protection to insure the lenders’ funds.
If you opt for a conventional loan and you are unable to make a 20% down payment as required, your lender will most likely require that you pay PMI.
So, what’s the advantage of private mortgage insurance, PMI to loan takers or homebuyers like you? A PMI loan gives you a chance to become a house owner even if you don’t have the required 20% down payment to take a mortgage loan. This can easily be taken as an advantage or opportunity because it’s saving you time. You don’t have to fork out thousands of dollars you don’t have in order to become a homeowner.
However, without proper knowledge, in the long run, you’ll find out that the cost of PMI outweighs the benefits it offers.
Estimated Annual Cost of Private Mortgage Insurance, PMI
Reiterating, PMI is the insurance cost that a homeowner pays a mortgage lender. The PMI doesn’t automatically make your payment whenever you default. Instead, the PMI provides protection for the lender when a homeowner defaults on a loan and the house goes into foreclosure.
The background idea behind the PMI is that when a homeowner defaults on a loan and the lender needs to sell the foreclosed home. The home is sold at an auction in a bid for the lender to recover his money. However, based on foreclosure statistics, about 80% of the home value can be recovered through the auction. Then the 20% left will be covered by the PMI policy.
The amount you’ll pay for PMI depends on your credit score. Premium PMI can be heavy. It ranges from 0.55% to 2.25% of your original loan capital. For instance, if you have a PMI of 2% and your loan capital is $300000. You’ll be paying $6000 annually to keep up your PMI. However, you can decide to pay in monthly installments i.e $500/month for the year.
PMI isn’t a one-time expense. It is a recurring cost you’ll need to pay annually as long as your home equity is below 20% of your loan amount.
How To Avoid Paying Private Mortgage Insurance (PMI)
Now that you have an understanding of what PMI is, how it works, and its cost. It’s high time we talked about how you can avoid paying private mortgage insurance, PMI.
1. Go For a Loan That Doesn’t Require PMI
One of the simplest ways to avoid paying for PMI is to simply steer clear of loan programs that require PMI. Loans like the VA mortgage do not require any down payment or PMI for you to obtain a loan. The same goes for other government-backed loans like the FHA, or USDA mortgage. With these loan programs, you don’t need to worry about PMIs while obtaining a loan.
Furthermore, these loans have been made accommodating, even if you have a low credit score. So, if you don’t want to pay for PMI, then you should obtain your mortgage from any of these government-backed mortgage lenders.
2. Check out local homebuyer assistance programs
In a bid to render assistance to local homebuyers, more communities are becoming concerned about making housing more affordable. In some communities, this is sometimes called workforce housing.
Workforce housing is targeted at making homeownership affordable for people with certain occupations. The selected workforce cuts across occupations like Teachers, Firefighters, or first responders. These programs do not require PMI payments. So, you can avoid PMI payments by taking advantage of these programs.
3. Opt To Pay A Higher Interest Rate
If you want to avoid paying PMI, you can decide to opt for a mortgage with a higher interest rate. This is because some mortgage lenders can allow you to take a mortgage loan without paying PMI. Instead, you’ll pay for the PMI in exchange for higher interest.
However, there’s a qualification process you need to go through before you can apply for the mortgage loan option. If you’re qualified and you get approved, you can put down an amount less than the 20% standard for conventional loans. In compensation, you’ll have to pay a higher monthly mortgage as a result of the high-interest rate.
4. Purchase a less expensive home
If you’re a first-time homebuyer, it would be best if you buy a less expensive home. If you buy a less expensive home, you’d be able to afford the required down payments and avoid paying for PMI.
Private Mortgage Insurance, PMI gives you an opportunity to buy a house you want, even when you don’t have the required down payment percentage. PMI favors lenders more than you, a homebuyer. Also, PMI doesn’t automatically clear your loan defaults. It compensates lenders with up to 20% of your loan amount.
You can avoid paying for a PMI if you opt for government-backed mortgage loans, take a loan with higher interest, or purchase a less expensive house.