You may be wondering if there’s a way to avoid PMI. Luckily, you can get out of paying for it, but it’ll depend on which type you have, borrower-paid or lender-paid.
Let’s review what steps you can take to avoid paying either one.
How To Avoid Borrower-Paid PMI
There are a few ways you can avoid adding a PMI expense to your monthly mortgage payment, including making a down payment of 20% or higher, taking out a specific type of mortgage loan or taking out a piggy-back loan.
You can avoid BPMI altogether with a down payment of at least 20%, or you can request to remove it when you reach 20% equity in your home. Once you reach 22%, BPMI is often removed automatically.
Take Out An FHA Or USDA Loan
While it’s possible to avoid PMI by taking out a different type of loan, Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans have their own mortgage insurance equivalent in the form of mortgage insurance premiums and guarantee fees, respectively. Additionally, these fees are typically around for the life of the loan.
The lone exception involves FHA loans with a down payment or equity amount of 10% or more, in which case you would pay MIP for 11 years. Otherwise, these premiums are around until you pay off the house, sell it or refinance.
The only loan without true mortgage insurance is the Department of Veterans Affairs (VA) loan. Instead of mortgage insurance, VA loans have a one-time funding fee that’s either paid at closing or built into the loan amount. The VA funding fee may also be referred to as VA loan mortgage insurance.
The size of the funding fee varies according to the amount of your down payment or equity and whether it’s a first-time or subsequent use. The funding fee can be anywhere between 1.25% – 3.3% of the loan amount. On a VA Streamline, also known as an Interest Rate Reduction Refinance Loan, the funding fee is always 0.5%.
It’s important to note that you don’t have to pay this funding fee if you receive VA disability or are a qualified surviving spouse of someone who was killed in action or passed as a result of a service-connected disability.
Take Out A Piggyback Loan
One other option people look at to avoid the PMI associated with a conventional loan is a piggyback loan. Here’s how this works: You make a down payment of around 10% or more and a second mortgage, often in the form of a home equity loan or home equity line of credit (HELOC), is taken out to cover the additional amount needed to get you to 20% equity on your primary loan. Rocket Mortgage® doesn’t offer HELOCs at this time.
Although a HELOC can help avoid the need for PMI, you’re still making payments on a second mortgage. Not only will you have two payments, but the rate on the second mortgage will be higher because your primary mortgage gets paid first if you default. Given that, it’s important to do the math and determine whether you’re saving money or if it just makes sense to make the PMI payments.
How To Avoid Lender-Paid PMI
There’s no way to avoid paying for LPMI if you have less than a 20% down payment. You can go with BPMI to avoid the higher rate, but you still end up paying it on a monthly basis until you reach at least 20% equity. In that case, you’re back to the original amount from the BPMI scenario.
Private mortgage insurance (PMI) is an extra expense that conventional mortgage holders have to pay lenders each month. It typically applies to borrowers whose down payment on a home is less than 20 percent of the purchase price. Although the borrower is paying for it, PMI actually protects the lender.
But in general, the cost of private mortgage insurance, or PMI, is about 0.5 to 1.5% of the loan amount per year. This annual premium is broken into monthly installments, which are added to your monthly mortgage payment. So a $300,000 loan would cost around $1,500 to $4,500 annually — or $125 to $375 per month.
The lender calculates the PMI payment by multiplying your loan amount by the PMI rate and then dividing by 12. Suppose the loan amount is $475,000, and the PMI rate is 0.45%. In that case, the lender calculates your monthly PMI payment as follows. Then, the lender adds $178.13 to your monthly mortgage payment.
Private mortgage insurance (PMI) is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price. PMI protects the lender—not you—if you stop making payments on your loan.
Depending on your personal financial situation, location and lifestyle, that may or may not be realistic. That's why paying PMI isn't necessarily a bad thing if you can easily afford it. But if PMI would strain your budget or cause you to spend significantly more on a home than you'd like, it's a good idea to avoid it.
Unlike the principal of your loan, your PMI payment doesn't go into building equity in your home. It's not money you can recoup with the sale of the house, it doesn't do anything for your loan balance, and it's not tax-deductible like your mortgage interest.
Yes. You have the right to ask your servicer to cancel PMI on the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. The first date you can make the request should appear on your PMI disclosure form, which you received along with your mortgage.
So they effectively have a 20% down payment and do not have to pay mortgage insurance. The most common piggyback loan arrangement looks like this: An 80% first mortgage. A 10% second mortgage (usually a home equity line of credit)
Is mortgage insurance tax-deductible? No, private mortgage insurance isn't tax-deductible. The mortgage insurance deduction was made available again for eligible homeowners for the 2018, 2019, 2020 and 2021 tax years. It has not been renewed for the 2022 and 2023 tax years.
After you've bought the home, you can typically request to stop paying PMI once you've reached 20% equity in your home. PMI is often canceled automatically once you've reached 22% equity. PMI only applies to conventional loans. Other types of loans often include their own types of mortgage insurance.
Insurance payments — If it isn't taxes, consider your insurance payments. Like principal and interest, private mortgage insurance premiums generally don't change after your loan closes.
Paying private mortgage insurance adds to your monthly mortgage payment, but it doesn't have any negative effects beyond costing you some extra cash. On the plus side, PMI can allow you to buy a home — and begin building home equity — more quickly than if you waited until you saved up a 20% down payment.
If you can easily afford it, you should probably put 20% down on a house. You'll avoid paying for private mortgage insurance, and you'll have a lower loan amount and smaller monthly payments to worry about. You could save a lot of money in the long run.
Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.
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