What Is PMI On A Mortgage And What You Can Do To Avoid It

What Is PMI On A Mortgage And What You Can Do To Avoid It

 In Blog, Housing 101

PMI, also known as Private Mortgage Insurance, is how your lender protects against the borrower failing to pay. While we all like to think we’ll pay on time consistently when it comes to our mortgage, that isn’t always the case. That’s where PMI comes in. So what is PMI on a mortgage and what can you do to avoid it?

 

A common misconception about taking on a mortgage is that you always need PMI. In reality, there are a few different ways to avoid taking on PMI with your mortgage. When you’re buying your home, you have more options than you think.

 

 

What is PMI | home on a calculator

 

 

What Is PMI?

To start, let’s discuss PMI and what it means for your mortgage. As we mentioned earlier, the term stands for Private Mortgage Insurance. It’s generally paid monthly as part of your overall mortgage payment ot your mortgage lender.

 

When you apply for a mortgage, most lenders want a 20% downpayment. Of course, this isn’t always possible, so lenders typically will allow borrowers to purchase PMI for any mortgage without a 20% downpayment. The exact cost of PMI can vary. It’s usually between 0.5% and 1% of the entire mortgage loan amount annually.

 

However, if the borrower is current on their payments, PMI shouldn’t last long-term for the full length of the mortgage. The lender is required to terminate the PMI on the date when the loan balance reaches 78% of the original value of the home. In addition, if a borrower has paid the equivalent of 20% down on the home, they’re eligible to request the PMI be removed.

 

 

How to Avoid Paying PMI

Did you know that you don’t have to pay PMI on your mortgage? Now that you know what it is, you’re probably wondering what you can do to avoid it. You have more options than you think.

 

While most people know that you don’t need to pay for PMI if you are making a 20% or larger downpayment on your home, there are other instances where you can avoid paying it. Here are a few of the most common ways to avoid PMI:

 

  • Mortgage type – If you can’t afford a 20% downpayment, you can use what’s known as a piggyback loan. This is also known as an 80/10/10 loan. It’s essentially a second loan in addition to your first mortgage. While you’ll still need 10% in cash for your downpayment, you can also get a second loan for an additional 10% in addition to the 80% loan. However, you’ll likely have a higher interest rate on this second loan.
  • Higher interest rate – Another option is to just pay a higher interest rate rather than a PMI. You might be able to ask your lender to pay for the mortgage insurance, resulting in a higher interest rate. You’ll need to crunch the numbers to know if this is a good value for you.

 

These are the two most common options, aside from a 20% downpayment, that will allow you to avoid paying PMI for your mortgage. Talk to your lender to see if either one is right for your situation.

 

 

Be Confident About Your Mortgage

Taking on a mortgage is hard enough without also needing to worry about PMI. If you’re not able to afford the 20% downpayment in your market, consider one of the options above.

 

PMI is a way for your lender to feel more secure in your investment. That being said, you have more options than you think when it comes to avoiding paying for it.

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