What is PMI and How Can I Avoid It?

The mortgage process can feel like a whirlwind of confusing new terms, costs for items you haven’t heard of before and daily documentation requests from your lender. One of the terms that may come up during your lending process is PMI (private mortgage insurance) or MI (mortgage insurance).  This is important to learn as it can be the difference between a few hundred dollars monthly.

What is mortgage insurance?

Mortgage insurance was designed to help protect lenders in the case of borrowers defaulting on their loans. Depending on the loan type, some require an upfront payment and others require a monthly payment. However, mortgage insurance only exists in “riskier” situations for the lender, such as someone with an LTV (loan-to-value ratio) higher than 80%.

How can I avoid paying mortgage insurance?

Put 20% down on your loan
Conventional loans with an LTV (loan-to-value ratio) equal or less than 80% will avoid mortgage insurance altogether. This can seem like quite a lot to put down in the beginning; however, this could save you hundreds every month. This will be the option that makes sense for most families.

USDA loans
USDA loans are a great option for low to moderate-income families who want to live in rural areas. There is no PMI on these loans, however, due to the lack of down payment; there is an upfront insurance premium that can be wrapped into the life of the loan. However, there are income and area restrictions, so this may not be a viable option for everyone. Please talk with a Summit Funding loan officer to learn more about USDA loans.

VA loans
Another great option for avoiding mortgage insurance is the VA loan. However, this non-mortgage insurance loan is only for eligible active duty service members, veterans, and eligible surviving spouses. If you qualify, this can be a great way to avoid getting mortgage insurance. Please talk with a Summit Funding loan officer to learn more about VA loans.

Piggyback loans
A piggyback loan could be a viable option if you are close to having a 20% down payment but need some extra help. Piggyback loans are a combination of the 1st loan for 80% LTV (loan-to-value) and a second loan (that piggybacks on the first one) for 20% LTV. This will help you avoid mortgage insurance, but in turn, you will have 2 mortgage payments.  To find out if this is a good option, have your loan officer run a scenario for both to compare short and long-term costs.

If I do have it, when can I get rid of it?

Don’t worry, if you have to pay mortgage insurance, you are not stuck with it for life! There are two keys ways in which you can remove it.

Pay down your balance
After paying down the balance of your original mortgage to 80% LTV, you can request your mortgage insurance be removed. This will take a few years and you may have to make your request in writing. If you are looking to go this route, make an appointment with your loan officer to discuss.

Refinance into a different loan type
Some loan types such as FHA, have lifetime mortgage insurance, which means that as long as you have that loan, you will continue to pay every month. Getting rid of this insurance will require you to refinance into a different type of loan such as a Conventional loan. There are costs involved in refinancing, but if the market has grown since the purchase of your house or you have a better financial situation, this could be a great option. Now is a great time to discuss refinancing with your loan officer, give us a call today!

What’s the next step?

Now that you have a better grasp of mortgage insurance, the next step is to schedule a free consultation. In this consultation, you will go over your options with your loan officer and they can help calculate the costs of each option. If you’re ready to find the right solution for your family, CLICK HERE to find your local loan officer and schedule your quick home loan consultation.

Remember, we are here to help you! If you have any questions whatsoever about the loan process, whether this is your first purchase, you’re looking to refinance and get cash out, you’re a vet, an investor or just need to have someone take you by the hand, we got you covered! Click here to contact a Loan Originator near you.