What is PMI, and How Can I Avoid It?
If you’re gearing up to buy a new home, you’ve probably stumbled across the acronym PMI somewhere. It stands for private mortgage insurance, and it’s a policy designed to protect lenders from defaults or foreclosures. Anyone looking for home financing should be very clear on PMI, from when it’s necessary to what might be done to avoid it.
Private Mortgage Insurance
If you’re financing a new home and your down payment is less than 20% of the home’s purchase price, you’re likely going to be required to pay PMI. It’s purchased from a PMI company before the loan is completed, and it’s a separate monthly cost over and above your mortgage. The advantage to PMI for many prospective homeowners is the fact that it makes financing affordable for anyone who can’t scrape together an enormous down payment. The fact is, a 20% down payment isn’t feasible for everyone, so this is a workaround that puts homeownership in reach for folks who may not otherwise qualify.
There are ways to avoid paying PMI that don’t involve a 20% down payment, including what’s known as a piggyback loan or lender-paid mortgage insurance (LMPI). The first option means two loans are simultaneously taken out on the home, so that neither loan is for more than 80% of the purchase price. The downside, though, is that you have two mortgages. With LMPI, the cost of PMI is rolled into the interest rate over the life of the loan. That means you could end up paying more in interest costs for the entire loan term. The Cushing Team at Guild Mortgage here in Reno can explain the ins and outs of these options if you’d like to explore them further, as well as other options for avoiding PMI (like a VA loan), so don’t hesitate to reach out.
Can PMI End Early?
This is another advantage to PMI — there are ways to end it early. A refinance can be the ticket to ending those PMI payments, and so can pre-paying on mortgage principal to reach 20% equity (or more). Once you have that equity, you can ask your lender to cancel the PMI.
The Homeowners Protection Act is a federal law that requires lenders to automatically cancel PMI once the mortgage loan-to-value (LTV) ratio reaches 78%. All you need to do is stay current with your mortgage payments and wait.
Avoiding PMI doesn’t need to be a primary goal if you’re researching financing options. The best place to start is with the right information, and the Cushing Team is here to help. We’d love to hear about your homeownership goals so that we can make recommendations for financing that will suit your budget and your lifestyle. We’ll answer all of your questions about loan eligibility, PMI, and anything else you need to know — contact us today, and let’s get started.