How to Avoid PMI

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Perhaps the most universally available as well as competitive mortgage loans are those underwritten to standards set forth by Fannie Mae and Freddie Mac. Yet with either, if the loan amount is greater than 80% of the current market value of the subject property, mortgage insurance will be required. It used to be that these conventional loans required a downpayment of at least 20% of the sales price but in the late 1950s private mortgage insurance, or PMI, was introduced. PMI is an insurance policy that compensates the lender in the instance of default. This compensation is the difference between a 20% down payment and the borrower’s actual down payment. The simplest method of how to avoid PMI is borrowers simply make the required 20% down payment. But there are other, less cash-intensive ways to avoid PMI.

Using Multiple Loans to Avoid PMI

One popular method actually uses two loans instead of one. In this fashion, the first mortgage remains at the required 80% loan-to-value and the second loan is for the difference. For example, the borrowers want to make a down payment of just 5.0% of the sales price. The lender then structures the loan where the first mortgage is at 80% of the value and the second at 15%. Lenders refer to this as an 80-15-5, where the 5 denotes the borrower’s down payment.

Have the Seller Pay PMI

Sellers can also pay the PMI on behalf of the buyers at the closing table, just as with any other allowable closing cost and within the guidelines of the loan. For example, with a 5.0% down payment, the sellers are allowed to contribute up to 3.0% of the sales price toward the buyer’s closing costs, including the PMI policy.

Have Your Lender Pay Your PMI

Another way to avoid PMI is to have the lender pay for the policy. This in reality doesn’t eliminate PMI but the borrowers don’t pay for the policy with their own funds. This is referred to as LPMI, or Lender Paid Mortgage Insurance. With LPMI, the lender can adjust the interest rate on the note and provide a lender credit in the amount of the policy. With LPMI, there is just one premium.

Paying PMI With Monthly Installments

When borrowers do take out mortgage insurance along with a conventional loan the most common method of payment is in monthly installments. The mortgage insurance premium is calculated for the coming year and paid out in portions each month. While this may be more convenient and does not affect the interest rate on the loan, it does add to the monthly payment which directly affects how much someone can qualify for.

Unlike LPMI, where there is one premium, there is also a type of PMI called a “split premium” policy. These policies are a combination of a monthly installment payment and a portion of the premium rolled into the loan. With this method, the loan amount is increased as well as the monthly payment.

Ending PMI With a Refinance

It’s also possible to pay mortgage insurance when refinancing if the mortgage balance falls above the 80% requirement. This can happen if the property values have fallen since the mortgage was first taken out. When refinancing a conventional loan the lender orders a new appraisal to establish a current market value. It is this value that is used when determining whether or not PMI is needed. To avoid PMI when values fall, any of these previous methods can work. Many borrowers who find themselves in this situation choose to pay down the mortgage at the settlement table to avoid PMI altogether.

Conversely, let’s say that a couple takes out a conventional loan along with a PMI policy and after a few years into the loan they see that property values have risen since the initial purchase. Borrowers can then request to have a new appraisal made to see if the loan balance has fallen below the 80% requirement, negating the need for PMI.

VA Funding Fees

For those who are eligible for a VA home loan, they should know there is a form of mortgage insurance the VA refers to as the Funding Fee, which currently is at 2.15% of the sales price of the home for transactions with no money down, slightly higher for Reservists and qualified National Guard members. However, if the veteran is receiving compensation or will soon receive compensation for a service-connected disability or rated as so as a result of a discharge exam, they are exempt from paying this fee as well as those are entitled to receive disability payments. The other two government-backed loans, FHA and USDA, do not have such a disability waiver.

When obtaining conventional financing know that you don’t have to put 20% down. If your first lien is above 80% of the value, PMI will be an issue. But it doesn’t have to be. Talk to your loan officer and discuss which option is right for you.

When obtaining conventional financing know that you don’t have to put 20% down. If your first lien is above 80% of the value, PMI will be an issue. But it doesn’t have to be. Talk to your loan officer and discuss which option is right for you.

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