Most conventional lenders require private mortgage insurance for borrowers who put down less than 20 percent of the home’s value. PMI is a form of insurance that protects lenders from financial losses if a homeowner defaults on a mortgage. PMI can increase the cost of homeownership by several hundred dollars per month, but there are some ways to avoid the additional expense.
You May Be Able to Get Around PMI With a Conventional Mortgage
If you can’t put down 20 percent, you may be able to take out a second mortgage or a home equity loan at the same time that you take out your first mortgage. If no individual mortgage is for more than 80 percent of the home’s purchase price, you won’t have to purchase PMI.
You may also qualify for lender-paid mortgage insurance (LPMI). The cost would be factored into the interest rate over the life of the mortgage, so you would have a higher interest rate than you would if you purchased PMI yourself. LPMI must be paid for over the entire loan term.
You Could Cancel PMI for a Conventional Loan Later
Private mortgage insurance is required for homebuyers who have put down or paid off less than 20 percent of their home’s value. Once you reach 20 percent equity, you will be able to ask to have your private mortgage insurance canceled. If you don’t make that request when you reach 20 percent equity, the lender should automatically cancel the PMI when you have 22 percent equity.
After you have paid your mortgage for a few years, you may be able to refinance and switch to a new loan. That might eliminate PMI, but you would have to pay fees and closing costs.
Some Lenders Don’t Require PMI
You may be able to get a mortgage through a conventional lender that doesn’t require private mortgage insurance. If you do, the company may charge you a higher interest rate than a lender that requires PMI.
If you qualify for a loan through a government agency, such as the Department of Veterans Affairs, you may be able to avoid PMI. Federal Housing Administration loans require mortgage insurance, often at rates that are lower than the costs for PMI on a conventional loan. The downside is that you would not be able to cancel FHA private mortgage insurance unless you refinanced the loan.
Weigh Your Options
How much you might have to pay for private mortgage insurance would depend on many factors, including your loan-to-value ratio and credit score. Although most conventional lenders require private mortgage insurance, some don’t. You might also qualify for a government loan without PMI. In many cases, you could wind up paying more in the long run without PMI due to a higher interest rate or mortgage insurance payments over a longer period of time. Research several types of loans and compare costs to figure out which would be the best solution for you.