Private mortgage insurance (PMI) protects lenders against default and foreclosure. For a down payment of less than 20%, your lender will likely ask you to purchase PMI insurance from a business before approving your loan. PMI lets purchasers who cannot (or do not want to) put down a sizeable down payment get low-cost financing.

Not Paying PMI

Making a down payment equivalent to at least one-fifth of the buying price of the property is one approach to avoid paying PMI. For example, a $180,000 new house would need a $36,000 down payment to avoid PMI. While it is the easiest approach to prevent PMI, it may not be practicable. You may also seek cancellation of PMI if the value of your house has increased enough to lower your LTV below 80%. If the bank requires a professional evaluation, the borrower must pay for it.

Customers who qualify for a piggyback mortgage may also get one. Typically, a second mortgage or home equity loan is taken out together with the first. For example, an “80-10-10” piggyback mortgage covers 80% of the purchase price, 10% by the second loan, and 10% by your down payment. This reduces the first mortgage’s LTV to under 80%, removing the requirement for PMI. For example, a $180,000 new house would need a $144,000 first mortgage, a $ 18,000-second mortgage, and an $18,000 down payment. Finally, lender-paid mortgage insurance (LMPI) includes the cost of PMI in the mortgage interest rate. So you may wind up paying more interest during the loan’s term.

PMI Expiration

It is possible to get rid of PMI after a few years by refinancing (changing your existing loan with a new one), but you must consider the expenses of refinancing against the costs of continuing to pay mortgage insurance charges. You may also get rid of it early by prepaying your mortgage principle and owning at least 20% of your house. Once you reach that equity level, you may ask the lender to terminate your PMI. PMI usually ends if you keep up with your mortgage payments. The Homeowners Protection Act compels lenders to cancel insurance when the LTV ratio dips below 78 percent, which means your down payment plus any paid-off loan debt equals 22% of the purchase price.

It is possible to avoid PMI:

• Put 20% down on your home purchase
• Lender-paid mortgage insurance (LPMI)
• VA loan (for eligible military veterans)
• Some credit unions can waive PMI for qualified applicants
• Piggyback mortgages
• Physician loans

A few points about the above options:

With LPMI, the lender pays the PMI fee but charges a higher interest rate. Also, unlike PMI, LPMI does not go away. A piggyback mortgage allows purchasers to purchase a property with two loans instead of one. The first is a standard mortgage. An equity line of credit or a typical home equity loan are the two options. The second loan covers the remaining 20% down payment and has a higher APR.