What’s PMI and How Can You Avoid Paying It?

Pay Private Mortgage Insurance (PMI) or play the wait-and-save game? That’s the dilemma for a lot of would-be homebuyers. And it’s rarely an easy (or fun) choice.

Coming up with a 20% down payment can take years. And with home prices increasing 5-10% annually, the home of your dreams is sure to cost quite a bit more in 2022. So, rather than save, some homebuyers opt to pay PMI instead.

Why homebuyers are required to pay PMI

Usually you purchase insurance to protect yourself. PMI works differently: basically you pay to protect the mortgage lender in the event you can’t pay the mortgage. It’s mortgage lenders invention to protect themselves if a borrower stops making payments. 

In general, mortgage lenders consider buyers who put at least 20% down to have enough skin in the game that they’re low risk. That makes everyone else a riskier investment, so they require them to pay PMI. 

Good news about PMI—it’s not too expensive and you don’t pay it forever

Your lender typically requires you to pay PMI until you get to a Loan-to-Value (LTV) ratio of 80% loan to 20% equity. Once you do, you can request your PMI be cancelled, unless you’ve taken out a FHA loan (PMI never falls off when you choose this loan type). 

PMI also doesn’t cost too much, although the amount you pay can vary. Here’s a few ways to lower your payment. 

How much will you pay in PMI?

Homebuyers required to pay PMI typically pay around 0.5% annually of the total amount borrowed, with the cost split across all 12 months. Want real numbers?

  • $180,000 loan ($200,000 with 10% down), PMI $75/mo
  • $285,000 loan ($300,000 loan with 5% down), PMI $125/mo

When will you be done paying PMI?

FHA: If you take out an FHA loan, mortgage insurance continues for the life of the life. Ouch. You’d have to refinance your loan to get rid of it.

Conventional: On a conventional loan you only pay PMI until your equity reaches 20%. 

How you can avoid paying PMI entirely

Your house is probably your biggest expensive and the thought of spending extra is as appealing as week-old sushi. So, do you have to pay PMI? No, not if you do any of the following:

  • Put 20% down. Call the parents, check in with Grandma, collect every debt from your former roommates. When you put 20% down, you don’t pay PMI at all.
  • Opt for an 80-20 “piggyback” loan. 80-20 mortgage is paid through two loans, a first and a second mortgage. The “80” first mortgage covers the home loan; the “20” second mortgage is the down payment. The second loan in a piggyback loan usually has a higher interest rate.
  • Look for “owner financing.” In some situations, owner financing works like rent-to-own, in which case you probably won’t be required to pay 20% down or PMI.
  • Shop for homes at a lower price point. Consider the difference in down payment for a $250,000 home versus a $300,000 home: (we’ll save you the math: it’s $10,000). Lower price homes may fit your savings account better—and you can trade up or add on later.
  • Work with Homie Loans. Talk to Homie Loans today about your personal financial situation and how you can lower your PMI. Homie Loans can also lower the overall cost of your loan, regardless of your down payment.

To pay or not to pay? 

Whether PMI is bad depends on how much you already have in savings. No one wants to pay extra each month for their home, but if paying PMI means you can buy a $300,000 home now versus waiting five years while you save, eat ramen by the caseload, and pay five more years of rent, then paying a few thousand in PMI over that same period can make a lot of financial sense. Plus the $300,000 home you purchase now starts building equity ASAP and will likely increase in value each year you live there. True, it will do the same if you choose to rent and save … but you won’t be the one who benefits.

 

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