How to Avoid Mortgage Insurance

Avoiding Mortgage Insurance

Home buying can be a stressful and expensive process, but with careful planning, it doesn’t have to be. There are many factors to consider when calculating your possible mortgage payment: cost vs. down payment, interest, and possibly mortgage insurance.

Mortgage insurance, also known as PMI, is simply a means for lenders to lower their risk when granting mortgage loans to home buyers. It is not designed to protect you, the borrower, like many other types of insurance. It is designed only to protect your lender and will not help you in the event of payment default. While many first-time home buyers and those in the midst of credit repair may get slapped with mortgage insurance, there are many ways to avoid it. However, they all require a lot of foresight.

  • Put at least 20 percent down

    This is perhaps the most obvious solution to avoid paying PMI since lenders require a borrower with less that 20 percent equity to carry the insurance. With a higher down payment comes a lower loan-to-value ratio and, therefore, a less risky investment to your lender. Not only will putting 20 percent down on your loan help eliminate the possibility of having to pay mortgage insurance, but it will lower your overall mortgage payment and help you get a better interest rate.

  • Don’t get a FHA loan

    FHA (Federal Housing Administration) insured loans were designed to help those buying their first home by allowing them to borrow up to 97 percent of the purchase price of the property. While FHA loans require a smaller down payment than a conventional loan, they almost always come with mortgage insurance. However, unlike a conventional loan, the mortgage insurance premiums are paid directly to the federal government (the Federal Housing Administration, to be exact). With a conventional loan, mortgage insurance premiums are usually paid to a private mortgage insurance company.

    However, if you’re in the midst of credit restoration, you may benefit from an FHA loan in the long run. It may ultimately save you money, or it may cost you money. A mortgage broker can help you weigh the pros and cons.

  • Join the military

    There are many benefits to joining the military. Not only do you have the honor of protecting and defending your country, but you may also be able to qualify for financial benefits down the road. A VA-insured loan will not carry mortgage insurance with it, even if your down payment is less than 20 percent. That’s because a VA-backed loan carries with it the “VA guarantee,” which replaces the need for mortgage insurance.

    A VA loan usually requires an upfront “funding fee.” The cost of the fee is determined by your type of military service, the amount of your down payment, any disability status, and whether or not you’ve held a VA loan before.

  • Find a lender who will foot the bill

    Very occasionally, lenders will pay the mortgage insurance premium out of their own pockets. This is dependent on many factors though, so make sure to do your research in considering this option and whether or not you qualify.

Even if you are unable to avoid paying for mortgage insurance, don’t despair. You won’t be beholden to it forever. Once you have built 20 percent equity in your home, you can opt out of it, which can potentially save you hundreds of dollars per month. To learn more about selecting the best type of mortgage for your financial situation, click here.

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Posted in Mortgages
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