When purchasing a home in the US, many buyers face the added expense of mortgage insurance. This insurance protects lenders in case the borrower defaults on the loan, and it can significantly increase your monthly payment. Fortunately, there are several strategies you can employ to avoid mortgage insurance altogether. Here are some effective ways to help you bypass this added cost.
One of the most straightforward ways to avoid mortgage insurance is by making a larger down payment on your home. Typically, if you can put down at least 20% of the home's purchase price, you will not be required to pay private mortgage insurance (PMI). For example, on a $300,000 home, a down payment of $60,000 or more can eliminate the need for mortgage insurance.
Some lenders offer Lender Paid Mortgage Insurance (LPMI) as an alternative to traditional mortgage insurance. With LPMI, the lender pays the mortgage insurance premium upfront, typically in exchange for a slightly higher interest rate. This option can help keep your monthly payments lower and eliminate separate PMI premiums.
A piggyback loan involves taking out a second mortgage to cover a portion of your down payment. Usually structured as an 80/10/10 loan, where 80% is the first mortgage, 10% is the second mortgage, and the last 10% is the down payment, this strategy allows homeowners to avoid PMI while keeping the second mortgage paid off quickly.
Some lenders offer specific loans designed to avoid mortgage insurance altogether. These may include special financing options or government-backed loans. Research different financial institutions and their offerings. Some may provide competitive rates while allowing you to bypass PMI, which can save you significant money over the life of the loan.
A higher credit score can improve your chances of qualifying for better loan terms, potentially allowing you to pay a lower down payment without incurring PMI. Take time to boost your credit score before applying for a mortgage by paying down existing debt and ensuring all bills are paid on time.
If you are eligible, consider utilizing a VA (Veterans Affairs) loan or a USDA (United States Department of Agriculture) loan. Both of these government-backed loans often do not require private mortgage insurance, regardless of your down payment amount. This can be a fantastic way for eligible buyers to save on monthly costs while purchasing a home.
Once you have built up enough equity in your home and your loan-to-value ratio is under 80%, consider refinancing your mortgage to eliminate PMI. This can significantly reduce your monthly payments and save you money in the long run. Keep track of your home’s market value and your repayment history to know when it might be advantageous to refinance.
By employing these strategies, you can effectively avoid mortgage insurance and make your home purchase more financially feasible. Whether it’s through a larger down payment, exploring various loan options, or refinancing in the future, being proactive can save you both money and stress in the home buying process.
