Mortgage insurance is often an unwelcome expense when buying a home. It adds to your monthly payments and can significantly impact your overall budget. Fortunately, there are several strategies you can implement to avoid paying for mortgage insurance in the U.S.
1. Make a Larger Down Payment
One of the most effective ways to avoid mortgage insurance is to make a down payment of at least 20%. Lenders typically require private mortgage insurance (PMI) when the down payment is less than this threshold. By saving enough for a larger down payment, you can bypass this additional cost altogether.
2. Explore Lender-Paid Mortgage Insurance (LPMI)
Some lenders offer a program called lender-paid mortgage insurance (LPMI), where the lender pays the insurance premium on behalf of the borrower in exchange for a higher interest rate. This option can be beneficial in lowering your initial costs, although you should consider how long you plan to stay in the home, as it may end up costing you more in interest over time.
3. Consider a Piggyback Loan
A piggyback loan involves taking out two mortgages simultaneously. The first mortgage covers up to 80% of the home's value, while the second covers an additional 10-15%. This strategy allows you to avoid PMI since you're keeping your down payment at 20% or more when combined. However, piggyback loans require careful financial planning and may come with higher interest rates than a traditional mortgage.
4. Refinance When Possible
If you already have a mortgage and are currently paying PMI, consider refinancing. If your home has appreciated in value and you now have at least 20% equity, refinancing can eliminate the requirement for mortgage insurance. Before making this decision, ensure that the costs of refinancing do not outweigh the benefits, and consider market trends and interest rates.
5. Seek USDA or VA Loans
If you qualify, consider applying for a USDA loan or a VA loan. These government-backed loans typically do not require mortgage insurance, allowing you to purchase a home with little or no down payment. USDA loans are intended for rural areas and low-to-moderate-income buyers, while VA loans are designed for veterans and active military members.
6. Check for PMI Cancellation Options
Once you have achieved a certain level of equity in your home, you may be eligible to cancel your PMI. Review your lender's policy regarding PMI cancellation and ensure you meet the necessary criteria. Typically, you may need to request the cancellation once you reach 20% equity based on the original purchase price, or you may need an updated appraisal to confirm the current value of the home.
7. Maintain a Good Credit Score
Having a strong credit score can qualify you for better mortgage terms, including avoiding PMI. Lenders view borrowers with higher credit scores as lower risk, which may allow for more favorable loan conditions. Aim for a credit score of 760 or higher to increase your chances of getting into a loan that doesn’t require mortgage insurance.
In summary, avoiding mortgage insurance can lead to substantial savings in your monthly payment. Whether through a larger down payment, exploring specific loan options, or refinancing, implement these strategies to find the best financial path for your home purchase. Always review your options with a financial advisor or mortgage specialist to ensure you're making the best choices for your situation.
