If you’re buying a home, you’re most likely going to have to pay for Private Mortgage Insurance (PMI). A PMI is used so that lenders can protect themselves just in case you end up defaulting on your loan. When PMI is required it can inflate your monthly payments, so it’s in your best interest to avoid it.
For buyers who wish to avoid monthly PMI, here are three ways you can do that:
- Put 20% Down
You might have to save up for a while, but putting 20% down makes it so you can get a conventional loan that doesn’t require mortgage insurance as has low mortgage rates. Whether or not you have to pay for PMI is determined by your loan-to-value ratio. This is the amount you’re borrowing versus what the home is worth. Lenders will usually require PMI when your loan-to-value ratio is above 80%. Putting at least 20% down on the home is the most straightforward solution to avoiding paying a monthly PMI.
- Piggyback Mortgage
If you’re not able to go forward with the first option, you can split up your mortgage instead. Typically, you’d take out one mortgage for 80% of the home’s value, a second mortgage for 10% of the value and then use your down payment to cover the remaining 10%.
- Put PMI In Loan
Another option is to include the PMI costs into the loan. A lender will roll your PMI costs into your loan but will charge you a higher rate in exchange. You won’t have a separate PMI premium, but your monthly payments and the amount of interest you’ll pay overall will increase. Take a look at the numbers to identify if this option is worth it to include into the loan. You could refinance to a lower rate down the line, but you’d have to wait until you get below the 80% mark on the loan to avoid PMI.