Paul Sanchez
Private mortgage insurance (PMI) is an added cost that homebuyers must pay if they purchase a home with a down payment of less than 20%. This insurance protects the lender in case the borrower defaults on the loan. Fortunately, there are several ways to avoid paying PMI, including making a 20% down payment, using a VA or USDA loan, paying a higher interest rate, or getting a piggyback loan, among other options.
Ways to avoid mortgage insurance
| Characteristics | Values |
|---|---|
| Increase down payment | 20% or more |
| Lender-paid mortgage insurance | Pay a higher interest rate in return |
| Piggyback mortgage | Take out a second mortgage loan to make up 20% down payment |
| VA loans | For current and veteran service members and eligible spouses |
| USDA loans | Zero-down mortgages for lower- and moderate-income buyers in designated rural and suburban areas |
| Physician loans | For doctors and physicians |
| Portfolio loans | Offerings vary by lender |
| Special first-time home buyer loans without PMI | Research various mortgage products and their requirements |
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What You'll Learn
Use a piggyback mortgage
A piggyback loan is a loan you take out alongside a primary mortgage to avoid paying private mortgage insurance. It is also known as an 80-10-10 loan, where the primary mortgage covers 80% of the sales price, the piggyback loan finances 10%, and the down payment covers the remaining 10%. This type of loan can help you avoid paying PMI if you have a strong credit score and can qualify for two loans instead of one.
The piggyback loan structure can be beneficial if you don't have the full 20% down payment available and want to avoid PMI. It can also be used to reduce your down payment or buy a higher-priced home. However, it comes with additional costs and risks. You will need to pay closing costs on both loans, including origination fees and administrative charges. The second mortgage loan will also likely carry a higher interest rate than the first, which can make it more expensive than a traditional mortgage.
Before pursuing a piggyback loan, it is essential to understand how this financing works and if it suits your situation. You should also consider the risks involved, such as the possibility of higher interest rates on the second loan and the challenge of refinancing or selling your home with two loans. It is recommended to consult a financial advisor to explore all your options and ensure you are making an informed decision.
To secure a piggyback loan, you will need high credit scores, typically very good or higher. The requirements have become more stringent since the mortgage bubble and subsequent crisis in 2007-2008, making it much harder to qualify for two mortgage loans. Ensure you understand the requirements and costs by talking to a loan officer before proceeding with this loan option.
In summary, a piggyback mortgage can be a strategic tool to avoid private mortgage insurance, but it comes with its own costs and complexities. It is important to carefully evaluate your financial situation, seek professional advice, and understand the potential risks and benefits before committing to this loan structure.
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Explore special first-time home buyer loans without PMI
Private mortgage insurance (PMI) is a type of insurance that lenders require when home buyers make a down payment of less than 20% of the home's value. It protects the lender in case the borrower defaults on the loan. PMI is typically rolled into the monthly mortgage payment and can add a significant amount to the overall cost of the loan.
One option to avoid paying PMI is to consider special first-time home buyer loans without PMI. These loans are offered by numerous state and local governments, as well as a few nonprofit organizations. They can take various forms, such as grants, tax credits, subsidized loans, and down payment assistance. Some of these initiatives might provide enough support to help a buyer achieve the 20% down payment threshold, thus avoiding PMI.
Another option to avoid PMI is to consider a piggyback mortgage or an 80-10-10 loan. This is a unique second loan where the buyer needs only 10% down in cash. The buyer then takes out a second mortgage loan, which provides another 10% of the home's purchase price. So they effectively have a 20% down payment and do not have to pay mortgage insurance.
Additionally, VA loans, backed by the Department of Veterans Affairs, are another option to avoid PMI. These loans are available to current and veteran service members and eligible spouses. They do not require a down payment or mortgage insurance, although there is a one-time funding fee.
Finally, USDA loans, backed by the U.S. Department of Agriculture, are zero-down mortgages for lower- and moderate-income buyers in designated rural and suburban areas. Although USDA loans don't require mortgage insurance, they come with upfront and annual fees, which are usually much lower than most mortgage insurance premiums.
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Consider a VA loan
If you are a veteran or active-duty service member, a VA loan is a great option to avoid paying private mortgage insurance (PMI) and significantly reduce your mortgage costs. VA loans are backed by the Department of Veterans Affairs and offer several benefits, including no down payment and no PMI requirements.
VA loans are designed to make homeownership more accessible for veterans and eligible spouses. One of their key advantages is that they do not require a down payment, which is typically a significant hurdle for many homebuyers. With a VA loan, you can purchase a home without the need for a large sum of cash upfront.
Another significant benefit of VA loans is the absence of PMI requirements. PMI is typically required by lenders when homebuyers make a down payment of less than 20% of the home's value. It protects the lender in case the borrower defaults on the loan. However, with a VA loan, you can avoid this additional monthly expense, potentially saving you a substantial amount of money over the life of the loan.
While VA loans do not require PMI, they do have a one-time funding fee. This fee, known as the VA funding fee, helps lower the cost of the loan for taxpayers and supports the VA home loan program. The VA funding fee is typically between 0.5% and 3.30% of the loan amount, and it can be paid upfront or included in the loan amount. However, certain individuals, such as veterans with service-connected disabilities, may be exempt from paying this fee.
In addition to the absence of PMI and down payment requirements, VA loans also offer competitive interest rates and capped closing costs. These favourable terms make VA loans a popular alternative to traditional mortgage loans, as they can save borrowers money and make securing a loan more accessible.
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Look for alternative loan programs
If you are looking to avoid paying mortgage insurance, there are a number of alternative loan programs available. These include:
- Lender-Paid Mortgage Insurance (LPMI): This is when the mortgage lender covers your mortgage insurance so that you don't have to pay out of pocket. The catch is that you'll pay a higher interest rate in return. In reality, you're still paying for PMI, but in the form of interest instead of monthly premiums.
- Piggyback Loans: Also called an 80-10-10 loan, this is a unique second loan where the buyer needs only 10% down in cash. The buyer then takes out a second mortgage loan, which provides another 10% of the home's purchase price. This means they effectively have a 20% down payment and do not have to pay mortgage insurance.
- VA Loans: Backed by the Department of Veterans Affairs, these loans are for current and veteran service members and eligible spouses. They don't require a down payment or mortgage insurance, although there is a one-time funding fee.
- USDA Loans: Backed by the U.S. Department of Agriculture, these are zero-down mortgages for lower- and moderate-income buyers in designated rural and suburban areas. Although USDA loans don't require mortgage insurance, they come with upfront and annual fees.
- Home Ownership Investment Programs: Programs like Unison HomeBuyer allow you to double your 10% down payment into a full 20% down payment so you can access conventional mortgage loans without paying PMI. Instead of making monthly payments, Unison receives a share of any future change in the value of your home when you sell it.
- Alternative Mortgage Programs: These include fix-and-flip loans, investment property loans, and short-term bridge loans. Alternative mortgage programs almost always charge a higher mortgage rate and closing costs than traditional mortgages.
It's important to note that even if you don't have a 20% down payment, there are still numerous options available to help you avoid paying PMI. However, it's crucial to carefully compare the costs and benefits of each option before making a decision.
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Take out a larger down payment
Private mortgage insurance (PMI) is an added cost homebuyers must pay if they purchase a home with a down payment of less than 20%. This kind of insurance protects the lender in case the borrower defaults. Typically, a lender will require you to pay for PMI if your down payment is less than 20% on a conventional mortgage. The cost of PMI will increase your monthly mortgage payment, so it's important to weigh the alternatives.
One way to avoid PMI is to take out a larger down payment of 20% or more. This has advantages beyond lowering the monthly mortgage payment and avoiding PMI. You’ll also get a lower mortgage interest rate and own a bigger stake in your home right away. However, it is not advisable to empty your savings just to avoid PMI. Leave enough cushion for furnishing and maintaining the home, and covering emergency expenses. It may make more sense to pay for PMI for several years than to leave yourself short of cash.
There are other ways to avoid PMI, such as a piggyback mortgage, also called an 80-10-10 loan. This is a unique second loan where the buyer needs only 10% down in cash. The buyer then takes out a second mortgage loan, which provides another 10% of the home’s purchase price. So they effectively have a 20% down payment and do not have to pay mortgage insurance.
Another option is lender-paid mortgage insurance (LPMI) where the mortgage lender covers your mortgage insurance so you don’t have to pay out of pocket. However, in this case, you’ll pay a higher interest rate in return.
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Frequently asked questions
The most common way to avoid paying private mortgage insurance (PMI) is to make a 20% down payment on a conventional loan.
You could consider a piggyback loan, which is a second mortgage that helps you reach the 20% threshold. You could also look into lender-paid mortgage insurance (LPMI), where the lender covers your mortgage insurance in exchange for a higher interest rate.
Yes, FHA, VA, and USDA loans have different mortgage insurance requirements or may not require it at all. VA loans are for current and veteran service members and eligible spouses, while USDA loans are for lower- and moderate-income buyers in designated rural and suburban areas.
