Private mortgage insurance, or PMI, is insurance coverage that protects the lender in case a borrower defaults on a home loan.
Typically a lender will require you to pay for PMI if your down payment is less than 20% on a conventional mortgage. You can get rid of PMI after you build up enough equity in your home.
Private mortgage insurance isn’t necessarily a bad thing. It can open the door to homeownership when you don’t have a huge pile of cash to put down.
But the cost of PMI will increase your monthly mortgage payment, so it’s important to weigh alternatives.
Here are ways to avoid paying for private mortgage insurance:
A larger down payment offers advantages beyond lowering the monthly mortgage payment and avoiding PMI. You’ll also get a lower mortgage interest rate, pay fewer fees and gain equity in your home faster.
» MORE: Why the 20% down payment is dead
Sometimes lenders advertise “no PMI home loans.” In those cases, the lenders will pay for PMI, usually in exchange for charging a higher interest rate on the mortgage. This is known as lender-paid mortgage insurance. Make sure to compare the costs and benefits carefully when considering lender-paid versus borrower-paid private mortgage insurance.
Sometimes called a “piggyback loan,” an 80-10-10 loan lets you buy a home with two loans that cover 90% of the home price. One loan covers 80% of the home price, and the other loan covers a 10% down payment. Combined with your savings for a 10% down payment, this type of loan can help you avoid PMI.
VA loans, backed by the Department of Veterans Affairs, are for current and veteran service members and eligible spouses. They don’t require mortgage insurance, although there is a one-time funding fee.
Explore state housing finance agency programs
State housing finance agencies offer mortgage and down payment assistance programs to help people who qualify become homeowners. Sometimes the programs can include low-down-payment mortgages that feature reduced-cost mortgage insurance or don’t require PMI.
Ultimately, deciding whether to use more money for a down payment or pay for PMI is a balancing act. You’ll need to consider the amount of money you have available, the local real estate market and your monthly budget.
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