How to Avoid Needing Private Mortgage Insurance

home buyer

When you are getting a house, private mortgage insurance might be required, depending on how much you put down. This is a kind of insurance that protects the lender from potential foreclosure or default. If your down payment is less than 20 percent of the home’s cost, you will likely require PMI. It is an extra cost, but if you can’t afford a larger down payment, having a policy in place allows you to buy a home, even if you don’t have a lot of funds. Still, there are ways of avoiding it.

Making a Larger Down Payment

If you don’t want to get PMI, you can make a down payment that is at least a fifth of the total purchase price. So, if you are getting a $300,000 home, you would need to be able to put down at least $60,000. Of course, that amount might not be feasible for everyone. If you are serious about waiting to buy a home until you can put that much down, you will likely want to start saving as much money as possible.

You can start by creating a budget to track your spending and increasing your savings. If you have a life insurance policy you no longer need, you could consider selling that for cash. If you are thinking of selling your policy, you can review an online guide that explains what you need to know about selling it through a life settlement.

Other Kinds of Mortgages

Taking time to do your research can make preparing to apply for a mortgage go smoothly. If you can’t afford a larger down payment, you still have options. You could choose a piggyback mortgage which involves taking out another home equity loan or mortgage when you take the first one out.

You can cover 80 percent of the home’s price with the first one, 10 percent by the next one, and the last 10 percent by the down payment. Since the first mortgage’s loan-to-value rate will be less than 80 percent, you will not need PMI.

Of course, you would need to be a qualified borrower in order for this to work for you. You can also choose to get lender-paid mortgage insurance, which means PMI is already included in the interest rate, throughout the loan’s life. Of course, this can result in you paying more in interest. If you went with PMI, you would be able to get rid of it once you had paid enough off.

Ending Mortgage Insurance

After you have been paying into the mortgage for a couple of years, you might no longer need PMI. You could look into refinancing, which means replacing the loan with another one. Of course, there are some costs related to refinancing, so you would need to weigh that against the potential cost of paying premiums on the mortgage insurance.

Another way of potentially getting rid of it is by prepaying the principle on the mortgage so there is at least 20 percent equity in the house. Once you have built up enough equity, you can often request a cancelation of the insurance.

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