How To Avoid PMI

Private mortgage insurance (PMI), also known as mortgage insurance, is a premium that borrowers pay to cover the additional risk that lenders have to take if a downpayment is lower than 20%. Unfortunately, even if your down payment is lower, you can still get PMI. Here is a list of the different types of mortgage insurance and tips for avoiding PMI.

Different Types Of Mortgage Insurance

If your down payment on a conforming mortgage is less than 20%, there are two options for you to be charged PMI.

PMI is a monthly fee that you pay in addition to your mortgage payment. This is the most common method. This is known as Borrower PaidPMI. You can create your own estimates of how this might look using a mortgage calculator. Just make sure to check the box "Include PMI."

Another way is to have your PMI included in your mortgage payment as a higher mortgage rate. This is known as Lender Paid PMI. This means that you do not have to pay an additional monthly fee for mortgage insurance. Instead, you will pay a rate about .375% higher than the normal mortgage loan rate and a higher monthly mortgage payment.

Lender Paid PMI and Borrower Paid PMO is for Fannie Mae and Freddie Mac-backed conforming loan amounts up to $417,000 (or greater in some areas). The reason it's called "private mortgage insurance" is because the mortgage provider is a separate entity from the lender.

An FHA loan is another option with a low down payment. These loans are insured by the FHA, which backs the loan.

FHA MIPs may be slightly more costly, especially for a lower down payment -- you will have to pay monthly premiums and an upfront premium. After that, you can either pay cash or add the amount to your loan amount.

How To Avoid PMI

Low down payment borrowers often wonder: How can I avoid PMI?

A down payment of at least 20 percent is the best way to avoid PMI. In addition, this will ensure that you don't need mortgage insurance for any loan.

A second mortgage is another way to avoid PMI. To avoid PMI, the first mortgage must be limited to 80 percent of the property's value. A second mortgage usually allows for an additional 10 percent financing, making a total of 90 percent financing.

This will result in a second mortgage payment. However, it can sometimes be less expensive than borrowing money from a Borrower Paid PMI lender. Ask your lender for comparisons between all three options.

Note that you can't get a second mortgage if your down payment is less than 10%. This is because lenders typically limit total allowable financing to 90 percent for second mortgages.

Alternatives To The PMI

Low-down payment borrowers often wonder if there are any alternatives to PMI.

This question and the "How can I avoid PMI?" questions are different because alternatives often have the same cost but are marketed differently.

A jumbo loan above $417,000 illustrates this.

Some jumbos allow you to pay less than 20% down and have no mortgage insurance. This is a way to get rid of mortgage insurance. You won't save money by paying a higher interest rate for this loan. This is just like what you would pay with Lender Paid PMI (conforming loan)

Technically, you are not getting any exemption from the mortgage insurance fees. This is evident in marketing a conforming loan with Lender Paid PMI. However, it's not clear when you get a jumbo loan that has less than 20% down. These loans are often marketed with terms like "no mortgage insurance."

How To Cancel PMI

If you have a conventional conforming mortgage, your lender can usually request that you cancel your mortgage insurance after attaining 22 percent equity in the home. This means that your loan will have been paid down to 78% of the home's purchase price.

Borrower PaidPMI is better than Lender PaidPMI if you believe you can reach this level in a reasonable timeframe.

Lender Paid PMI means that your mortgage insurance is in the form of a higher interest rate. This increased cost will be with you for the entire term of the loan. A jumbo mortgage is the same, except that there is no mortgage insurance fee for low-down jumbos. Instead, the rate will be higher.