Recently I was invited to contribute to an article for U.S. News on How to Avoid PMI on a Mortgage with Less Than 20% Down by Gina Freeman. The article includes various strategies on how to avoid private mortgage insurance. Private mortgage insurance is typically required when someone is putting down less than 20% for a home purchase or if someone has higher than an 80% loan-to-value if they’re refinancing a property and are using a conventional mortgage.
There are many ways private mortgage insurance (pmi) can be paid for, including a lump sum “single premium” as a closing cost or as part of the monthly mortgage payment. There is also “split premium” which is a combo of a single premium and monthly and lender paid. The seller may even be able to contribute towards private mortgage insurance if negotiated in the real estate contract and the loan meets required guidelines.
With conventional financing, the private mortgage insurance is set to automatically drop off the payment when the loan to value reaches 78% based off of the original sales price or appraised value (the lower of the two) assuming the mortgage is in good standing.
It’s not unusual to meet with potential homebuyers and hear them say “I don’t want pmi” or “I need to save up for 20% down payment so I don’t pay pmi”. I would strongly encourage homebuyers to be open to the option of having private mortgage insurance. I’m currently working with a couple who wants to buy a home large enough for their family. I’ve ran some numbers for them based on what they have available for funds for closing and how much they would ideally like to have for their total mortgage payment. Without pmi, they would have a sales price of around $585,000 and with the addition of private mortgage insurance (and not limiting themselves to 20% down payment), they can look at homes priced around $740,000. This will allow them to have more options for their family and the private mortgage insurance is not permanent – as I mentioned earlier, it will drop off automatically at 78% loan to value or when they go to refinance, if the home continues to appreciate as forecasted, they may be able to either drop the pmi, reduce it or opt to use the “single premium” option and pay it as a closing cost.
The cost of private mortgage insurance varies depending on your credit score, the loan-to-value (how much equity in the home), the term of the mortgage amoung other risk factors.
Bottom line, as I mention in the article for U.S. News, it’s important to review all of your options and I don’t recommend ruling out private mortgage insurance until you compare it to other scenarios, including piggy backed mortgages or home equity lines of credit.
If you’re thinking about buying or refinancing a home, I am happy to help you!
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