Did you know there are alternatives to paying mortgage insurances on a home loan? That’s right there are a handful of lenders that offer no PMI loans in today’s marketplace. There are now other options for getting a no PMI mortgage. If you want to not pay that extra $100 or $200 per month, there are options available in the 2017 home financing market to help you reach your goal. You need help learning about no PMI mortgage programs that may be available with your qualifications.
Lender Paid Mortgage Insurance
Some lenders will allow you to use LPMI which basically means that the lender is paying the PMI for you. Sounds like a great deal, right? Well the down side is that you will accept having a .75% mortgage rate increase. Your payment will be higher, but not paying PMI, that can be a good deal. So in 2017, lender paid mortgage insurance options are the most sought after no PMI loans in most states.
This could work out well for you, but you will want to talk about lender paid mortgage insurance with your lender carefully before you do it. If you do opt for LPMI, you will not be able to cancel the insurance when you reach 20% equity. Your only option to get rid of PMI is to refinance into a no PMI loan.
Some buyers decide that lender paid mortgage insurance is a good deal and they go for it. They like the fact that you can buy more house if you do not have to save for a 20% down payment. If you do not have to put as much money down, you can use that thousands of extra cash to pay for home improvements. This is one of the many reasons people are raving about no PMI mortgage financing.
Note that money that you pay for mortgage interest can be written off each year, but you cannot do that with PMI payments. So you will want to avoid paying PMI if you can.
A popular way to avoid PMI is to bring at least a 10% down payment. Rather than getting one 90% mortgage, you will get two mortgages that have been piggybacked onto one another. A common deal is to have an 80% first mortgage and a 10% second mortgage, followed by a 10% down payment. This arrangement can avoid PMI. Piggyback loans are definitely the “old school” method for no PMI loans.
Shop Around for No PMI Loans
Yes, there are several unique opportunities to get a mortgage without PMI today. There are lenders available that advertise no PMI loans if you bring a 5% down payment to the table. The most likely way they are able to offer this is by paying the private mortgage insurance for you and charging you a higher interest rate. Find out if you are eligible for a zero-down home loan with no mortgage insurance.
Is this a good deal? It depends. We advise that you run the numbers on the mortgage with and without PMI at the different rates. See which no PMI mortgage requires you to pay more.
Do the Math When Considering the No PMI Mortgage
If you have a conventional loan and you are nearing 20% equity, you need to request that your lender cancel your PMI. If you do not request it, it is likely that the lender will continue to charge you the insurance. So don’t give away money – tell your lender to cancel your mortgage insurance.
However, if you have an FHA insured loan, you will have to pay mortgage insurance for the entire life of the loan, regardless of what your amount of equity is. This obviously is a bad deal, so when you are close to 20% equity, we strongly advise that you consider refinancing out of your FHA mortgage. There are many loan products available once you have 20% equity to avoid paying PMI.
Many people do not have the ability to put 20% down to buy their home. Or, they may have the down payment, but putting down 20% would eat up most or all of their available cash.
Most people want to do home improvements soon after they buy a home. So rather than having to put down 20% to avoid PMI, it is a good idea to avoid PMI in another way if you can.
We like the no PMI mortgage option with the lender paying for mortgage insurance. Even if you have to pay a higher rate, remember that you can write off that mortgage interest at tax time. You can’t write off your PMI payments.
Why Get a Home Loan with No Private Mortgage Insurance (PMI)
One of the ways that mortgage lenders evaluate risk for underwriting a mortgage is your loan to value ratio or LTV. The LTV ratio is a simple calculation done by dividing the loan amount by the home’s value. The higher your LTV, the more the risk to the lender.
Usually a mortgage with an LTV that is above 80% will require private mortgage insurance or PMI to be paid be the home owner. PMI is a substantial monthly cost that you should keep in mind when considering a home loan.
The major reasons people try to get a loan without paying PMI include:
- PMI is expensive; see the below example to learn more
- You can get a mortgage without PMI if you put at least 20% down. While this is not easy for many people, you do avoid having to pay PMI with the higher down payment.
- Lender Paid Mortgage Insurance– This is one of the latest trends and it makes sense, because you pay a slightly higher interest rate on this mortgage, but the bank or lender pays the mortgage insurance up-front when your loan closes in escrow. It’s important when considering this option, so calculate the difference between paying PMI monthly with the lower rate mortgage when compared to the lender paid mortgage insurance option.
To understand what PMI can cost you, let’s review a simple example. If your home is priced at $300,000, and you are getting a loan for $270,000, the LTV ratio is 90%. You are bringing a $30,000 down payment. Depending upon your mortgage type, the PMI payment could be from $110 to $150 per month. An adjustable rate mortgage requires you to pay more for PMI than a fixed rate loan.
PMI is not always permanently required. Lenders must drop your mortgage insurance requirement when the LTV gets to 78% through both home appreciation and principal reduction. If some of the reduction of the LTV ratio is due to home appreciation, a new appraisal is needed to verify the appreciation amount.
One of the most common ways to not pay PMI is to use a a second-mortgage. This is also referred to as a piggyback loan. To do this, the borrower gets a first mortgage that is equal to 80% of the value of the home. This avoids PMI. Then, you take out an equity loan or HELOC that is equal to the homes sale price, minus the down payment and the first mortgage amount.
So, in the above example, the borrower would get a $240,000 first mortgage, pay $30,000 down, and get a second mortgage in the amount of $30,000. You do not need to pay PMI because the LTV ratio on your first mortgage is 80%. But you would need to pay a second mortgage with a higher interest rate than the first mortgage. There are all kinds of 2nd mortgages, but you will always need to pay a higher interest rate. Still, the payments of the two loans together usually are less than the payment on the first mortgage plus PMI.
Considerations with PMI
Many people have to think about PMI costs because many of them are putting less money down to get a mortgage. There are many loans today that people can get with less than 20% down. One of the most popular by far is FHA financing. That loan requires only a 3.5% down payment with a 580-credit score, but it does come with a hefty monthly mortgage insurance premium.
If you have less than 20% to put down, you will have two options regarding PMI:
- Get only a first mortgage with a lower down payment and pay PMI until your LTV gets to 78%. Then PMI usually can be dropped. For people who have an FHA loan written since 2013 however, many of these loans have a permanent mortgage insurance requirement. If you put down more than 5%, you can only cancel your PMI after 11 years. If you put down less than that, you must pay PMI permanently. So, once you get to 78% LTV, you may want to consider refinancing out of your government-home loan.
- Get a second mortgage. This will probably get you a lower payment at least at first than if you had PMI. But note that the second has a higher rate than the first. It can only be eliminated if you pay it off, or refinance the first and second into one mortgage. That would usually be when the LTV gets to 80% or less.
There also are several other things to think about regarding paying PMI:
- What are the tax savings with paying PMI, rather than paying interest on your second mortgage? Tax laws in the US allow you to deduct PMI payments if your income is under $100,000 gross per year.
- What is the cost of the new appraisal to drop PMI, vs. costs of refinancing your first and second mortgage? You have to pay for the appraisal, and this can be up to $500.
- The risk that interest rates could go up from the time you get the mortgage, and the time you will refinance the first and second. If the rates rise significantly, your second mortgage rate will rise. Most second mortgages used to avoid PMI have a variable interest rate.
But the most important consideration is what you think the rise in home appreciation will be in the next several years. If you just get a first mortgage with PMI, how fast will the home appreciate so that you can drop PMI (or refinance out of an FHA lien)?
Most people want to get approved for a no PMI mortgage because it avoids having to pay mortgage insurance monthly, but there are cases where it might make sense to pay PMI. One of the most common is where a person has poor credit and can only get a HUD-backed loan from FHA with mandatory PMI for the life of the loan. Paying PMI stinks, but paying rent until your credit is good enough to get a conventional loan may be worse!
References: How to Outsmart PMI. (n.d.). Retrieved from http://www.investopedia.com/articles/pf/07/outsmart-pmi.asp