Private Mortgage Insurance: What Is It and How to Deal with It?

As a first-time home buyer, your excitement can sway you. Owning a home is the American dream. In the midst of this excitement, you might be signing up for a yearly recurring cost. 

In fact, this cost is private mortgage insurance (PMI). As a homeowner, it is common to overlook this cost. However, if you do not prepare yourself accordingly, the recurring cost of PMI can accumulate quickly and become a financial burden. 

However, if you prepare, plan, and know about private mortgage insurance, you’ll find ways around it so it doesn’t become a financial burden. And what’s more, you can avoid paying PMI. 

In this article, you’ll learn about PMI and how you can deal with this payment. This article will guide you on how to avoid paying private mortgage insurance. Moreover, you will also learn other necessary details. Hence, to learn more, read on to the end of the article. 

What Is Private Mortgage Insurance?

Everyone wants to be a homeowner, but not everyone can buy a house without mortgage assistance. Mortgage loans have made it possible for most people to become homeowners. So, how does PMI relate to mortgage loans? 

Private mortgage insurance is a cost that you pay to offer protection to the loan lender. In the advent of a default on a mortgage loan taken, the PMI acts as protection to insure the lenders’ funds. 

If you opt for a conventional loan and you are unable to make a 20% down payment as required, your lender will most likely require that you pay PMI. 

So, what’s the advantage of private mortgage insurance, PMI, to loan takers or homebuyers like you?  A PMI loan gives you a chance to become a house owner even if you don’t have the required 20% down payment to take a mortgage loan.  

In fact, you can easily take this as an advantage or opportunity because it saves you time. Basically, you don’t have to fork out thousands of dollars you don’t have in order to become a homeowner. 

However, without proper knowledge, in the long run, you’ll find out that the cost of PMI outweighs the benefits it offers.

How Does the Private Mortgage Insurance Work?

Private Mortgage Insurance is the extra fee that you pay for a conventional mortgage. This only happens when you make a downpayment of less than 20% for a home that you are buying. 

Basically, as a loan borrower, you have to pay for the Private Mortgage Insurance. However, this payment actually protects the lender. In fact, this payment compensates for the extra risk that the lender takes up by offering you a larger loan. Remember, here, the down payment is low from your end. 

On the other hand, you do not need to pay for the PMI forever. For instance, lenders can cancel the mortgage payment when the balance drops to 78% of the original value of your property. Also, lenders can cancel the mortgage when you are halfway through your loan term. 

Apart from that, if your home value is such that you have a 20% equity on it, and if you are ahead of your payment schedule, you can request the lender to call off the mortgage. 

Estimated Annual Cost of Private Mortgage Insurance, PMI

Reiterating, PMI is the insurance cost that a homeowner pays a mortgage lender. The PMI doesn’t automatically make your payment whenever you default. Instead, the PMI provides protection for the lender when a homeowner defaults on a loan, and the house goes into foreclosure. 

The background idea behind the PMI is that when a homeowner defaults on a loan, the lender needs to sell the foreclosed home. The home is sold at an auction in a bid for the lender to recover his money. However, based on foreclosure statistics, about 80% of the home value can be recovered through the auction. Then, the 20% left will be covered by the PMI policy. 

The amount you’ll pay for PMI depends on your credit score. Premium PMI can be heavy. It ranges from 0.55% to 2.25% of your original loan capital. For instance, if you have a PMI of 2% and your loan capital is $300000. You’ll be paying $6000 annually to keep up your PMI. However, you can decide to pay in monthly installments, i.e., $500/month for the year. 

PMI isn’t a one-time expense. It is a recurring cost you’ll need to pay annually as long as your home equity is below 20% of your loan amount.

How To Avoid Paying Private Mortgage Insurance (PMI)

Now that you have an understanding of what PMI is, how it works, and its cost. It’s high time we talked about how you can avoid paying private mortgage insurance, PMI.

1. Go For a Loan Where There Is No PMI

One of the simplest ways to avoid paying for PMI is to simply steer clear of loan programs that require PMI. Loans like the VA mortgage do not require any down payment or PMI for you to obtain a loan.  

On the other hand, the same goes for other government-backed loans like the FHA or USDA mortgage. Actually, with these loan programs, you don’t need to worry about PMIs while obtaining a loan. 

Furthermore, these loans have been made accommodating, even if you have a low credit score. So, if you don’t want to pay for PMI, then you should obtain your mortgage from any of these government-backed mortgage lenders. 

2. Check out local homebuyer assistance programs

In a bid to render assistance to local homebuyers, more communities are becoming concerned about making housing more affordable. In some communities, this is sometimes called workforce housing.

Workforce housing is targeted at making homeownership affordable for people with certain occupations. The selected workforce cuts across occupations like Teachers, Firefighters, or first responders. These programs do not require PMI payments. So, you can avoid PMI payments by taking advantage of these programs.

3. Choose To Pay a Higher Interest Rate

If you want to avoid paying PMI, you can decide to opt for a mortgage with a higher interest rate. This is because some mortgage lenders can allow you to take a mortgage loan without paying PMI. Instead, you’ll pay for the PMI in exchange for higher interest.

However, there’s a qualification process you need to go through before you can apply for the mortgage loan option. If you’re qualified and you get approved, you can put down an amount less than the 20% standard for conventional loans. In compensation, you’ll have to pay a higher monthly mortgage as a result of the high-interest rate.

4. Purchase a less expensive home

If you’re a first-time homebuyer, it would be best if you buy a less expensive home. If you buy a less expensive home, you will be able to afford the required down payments and avoid paying for PMI.

Prepare for Private Mortgage Insurance Now 

Private Mortgage Insurance, PMI, gives you an opportunity to buy a house you want, even when you don’t have the required down payment percentage. PMI favors lenders more than you, a homebuyer. Also, PMI doesn’t automatically clear your loan defaults. It compensates lenders with up to 20% of your loan amount. 

You can avoid paying for a PMI if you opt for government-backed mortgage loans, take a loan with higher interest, or purchase a less expensive house.  

Do you have more suggestions on how to deal with private mortgage insurance? Please share your ideas and opinions in the comments section below.