Monthly home loan payments are made up of a few different costs, and for many people, private mortgage insurance (PMI) is one of these costs. Lenders include PMI as part of the monthly payments as a way to protect themselves, in case the borrower ever falls behind on payments. PMI is usually required for all borrowers who are putting down less than 20 percent of the home’s sale price. Different factors influence how the monthly PMI rate is determined, but a good rule of thumb is normally $40-$50 for every $100,000 borrowed. Although having the cash for a 20 percent down payment is often easier said than done for many, there are still other ways you may be able to get rid of PMI. Consider any of the following if you currently pay PMI for your mortgage, or if you’re in the process of applying for a mortgage:
Take out an 80-10-10 home loan
With this type of home loan, homeowners make a 10 percent down payment, take out a mortgage for 80 percent of the home’s value, and then borrows the remaining 10 percent through an additional home loan. Frequently known as piggyback mortgages, these types of loans can give borrowers the opportunity to avoid PMI entirely.
Buy a less expensive home
If you have $20,000 saved for your down payment and you’re thinking about buying a $200,000 home, you may want to reconsider, since this is only a 10 percent down payment. Instead, you may want to explore your options and see what’s available for around $100,000. You may find a great home in a desirable location, and the money you have saved up can allow you to put down 20 percent and you won’t have to pay PMI.
Submit a written request
If you have been keeping up with your monthly payments, you can ask your lender to cancel the PMI through a written request. Bear in mind, however, that you will only qualify to have this request granted after you have reached the date that your principal balance is expected to dip below 80 percent. If you’re not sure when this date is, ask your lender.
Consider lender-paid PMI
If you’re willing to opt for a higher interest rate on your home loan, you may be able to have the lender pay the PMI. This can be a cost-effective option, depending on how long you plan on owning the home and the length of your mortgage.
Refinance your home loan
If you’re paying a lot each month in interest and PMI, you could potentially take care of both these issues by refinancing your mortgage. Depending on the rate you may be eligible for through a refinance, you may be able to lower your interest and get rid of PMI at the same time.
Pay off the home loan faster
Whether you make bigger payments or pay more often (for instance, bi-weekly instead of monthly), you’ll get equity in your home quicker, and this can help you get rid of PMI much faster as well.
Wait it out
Your lender will automatically take PMI out of your payments once you have 78 percent of the mortgage left, regardless of whether you submitted a written request, assuming you have been timely with your payments.
Other types of home loans, like FHA mortgages and VA loans, have much different terms and conditions as far as PMI goes. And if you don’t have a traditional mortgage, such as a balloon mortgage or an interest-only mortgage, PMI terms and conditions may vary as well. Be sure to speak with your lender about your specific mortgage, and the options available for you to eliminate PMI.
Do you want to buy a home, but you need money for a down payment? Peachtree Financial Solutions may be able to help. If you’re receiving long-term annuity payments, we can buy some or all of them and give you your money sooner in one lump. Contact us today to learn more!
Nothing above is meant to provide financial, legal, or tax advice. You should meet with appropriate professionals for such services.