How To Avoid Paying Private Mortgage Insurance: Some Effective Ways
by Marie Nelson
Private mortgage insurance is a cost which you have to bear when you make a down payment of less than 20% for a home mortgage loan. It is a necessary requirement for you and it is used to protect the lender in the event of a payment default.
Private mortgage insurance can add over $100 to the mortgage payment you are making every month. What is more annoying is that this extra amount is meant to protect the lender and not you, the borrower. It will take you a lot of time to attain the 20% benchmark. Therefore, it is sensible to look for feasible ways to avoid paying private mortgage insurance. Some of the proven techniques have been discussed below.
Ways To Avoid Paying Private Mortgage Insurance (PMI)1) Go for a piggyback loan
Suppose you want to buy a house for $200,000 and you only have sufficient amount saved for a down payment of 10% which is not adequate to do away with private mortgage insurance. In this situation, you can go for an 80/10/10 contract, where you assume a loan which amounts to 80% of the overall price of the property or $160,000. You can subsequently assume a piggyback loan of $20,000 which amounts to 10% of the price.
Ultimately, as a borrower, you can pay down the remaining $20,000 or 10% of the home value.
In this way, you are breaking up loans and you will ultimately have the opportunity to deduct interest on both the loans and do away with private mortgage insurance on the whole. However, there is a hitch. The terms and conditions of a piggyback loan can be quite stringent. Most of them are adjustable rate loans and are subject to balloon provisions. If possible, you can go for an 80/15/5 setup if the lender permits that. It functions precisely in a similar manner. 2) Try to attain the loan to value ratio
As the loan provider would work out the loan to value ratio on the basis of the original buying price, it is essential that you keep an eye on the current market price of your home. To be precise, if the value of your home has gone up, then just go for an expert evaluation and forward it to the loan provider, corroborating the fact that the home value has really gone up. Though expert evaluations will only cost you $100-200, it is something worth spending, if it helps you avoid the payment of private mortgage insurance.3) Refinance your existing mortgage
Prior to taking recourse to a refinance of your existing home loan, it is better that you evaluate the cost against the amount you save on a monthly basis. Comparing oranges to oranges is important in this regard. For example, if the remaining term of your existing mortgage is 15 years, then you should look for refinance quotes for a 15-year mortgage for your present balance.
If your present loan asks for private mortgage insurance and a new loan does not, and you are eligible for a cheaper rate, going for refinance might be a reasonable step. However, to find out whether refinance is really helping you save money, you have to take into consideration the time which is required to recover your closing costs through the amount you save every month. You also have to ensure that you are going to stay in that home for that specific time.4) Pay a higher rate of interest
You can consent to pay a higher rate of interest instead of paying PMI. A number of lenders will be glad to cancel it when borrowers don’t have the 20% down payment but are ready to pay a higher rate (0.75%-1% more) throughout the tenure of the loan.
Since private mortgage insurance is a costly affair, if you don’t feel you have the capacity to achieve 20% equity in your home inside a period of 1-2 years, then it would be prudent that you either go for a bigger down payment or think about a piggyback loan. The moment you are indebted for an amount which is 80% or less of the value of your home, you can successfully revoke PMI. Despite the fact that piggyback loans are riskier than traditional home loans, the interest is tax deductible and these loans work as outstanding substitutes for the borrowers who find it difficult to manage bigger down payments.
Marie is an experienced blog writer who loves to write on a range of topics including home loans, relevant life insurance
, annuities, and investment in stock market.