Private mortgage insurance (PMI) is an additional cost added to monthly mortgage payments when a borrower makes a down payment of less than 20% of the home’s purchase price. PMI protects the lender in case of default, but it can be a significant financial burden for borrowers. This article explores strategies to avoid PMI without putting down 20% and cites reputable sources for further information.
Key Facts
- Lender-Paid Mortgage Insurance (LPMI): Some lenders offer LPMI, where the lender covers the cost of mortgage insurance in exchange for a higher interest rate. This allows borrowers to avoid paying PMI premiums on their monthly mortgage payment. However, it’s important to note that the higher interest rate effectively includes the cost of PMI.
- Piggyback Loan: Another option is to use a piggyback loan, which involves taking out a second mortgage to cover a portion of the down payment. For example, with an “80/10/10” piggyback loan, the borrower puts down 10% in cash, takes out an 80% first mortgage, and a second mortgage for the remaining 10%. This way, the borrower can avoid PMI.
- Specialized Programs: Some lenders and banks offer programs that allow for a low down payment without PMI. These programs may have additional perks for first-time homebuyers, lower-income individuals, or certain professionals. Examples include the Neighborhood Assistance Corporation of America (NACA), Bank of America’s Affordable Loan Solution mortgage, CitiMortgage’s HomeRun Mortgage, Movement Mortgage’s “Dream to Own” mortgage, and Caliber Home Loans’ “Elite Access” program.
- State or Local Homebuyer Assistance Programs: Many state and local governments, as well as nonprofit organizations, offer programs specifically designed for first-time homebuyers with no PMI option. These programs can provide grants, tax credits, subsidized loans, or down payment assistance to help buyers achieve the 20% down payment threshold and avoid PMI.
Lender-Paid Mortgage Insurance (LPMI)
Some lenders offer LPMI, where the lender covers the cost of mortgage insurance in exchange for a higher interest rate (Bankrate, 2023). This allows borrowers to avoid paying PMI premiums directly but effectively includes the cost in the higher interest rate.
Piggyback Loan
A piggyback loan involves taking out a second mortgage to cover a portion of the down payment (Investopedia, 2020). For example, an “80/10/10” piggyback loan consists of an 80% first mortgage, a 10% down payment, and a 10% second mortgage. This strategy allows borrowers to avoid PMI but may result in higher overall financing costs.
Specialized Programs
Certain lenders and banks offer programs that allow for a low down payment without PMI (The Mortgage Reports, 2023). These programs may target first-time homebuyers, lower-income individuals, or specific professionals. Examples include NACA, Bank of America’s Affordable Loan Solution, and CitiMortgage’s HomeRun Mortgage.
State or Local Homebuyer Assistance Programs
Many state and local governments and nonprofit organizations provide programs specifically designed for first-time homebuyers with no PMI option (Bankrate, 2023). These programs offer grants, tax credits, subsidized loans, or down payment assistance to help buyers reach the 20% down payment threshold and avoid PMI.
Conclusion
Avoiding PMI without a 20% down payment is possible through various strategies, including LPMI, piggyback loans, specialized programs, and state or local homebuyer assistance programs. It is important for borrowers to research and compare these options carefully to determine the best approach based on their financial situation and long-term goals.
Sources
- Bankrate: Basics of Private Mortgage Insurance (PMI)
- Investopedia: How to Outsmart Private Mortgage Insurance
- The Mortgage Reports: How to Avoid PMI Without 20% Down
FAQs
What is PMI and how can I avoid it?
PMI is private mortgage insurance, which protects the lender in case of default. It is typically required when a borrower makes a down payment of less than 20%. To avoid PMI, borrowers can consider strategies such as LPMI, piggyback loans, specialized programs, or state/local homebuyer assistance programs.
What is LPMI and how does it work?
LPMI stands for lender-paid mortgage insurance. With LPMI, the lender covers the cost of PMI in exchange for a higher interest rate on the mortgage. This allows borrowers to avoid paying PMI premiums directly, but the cost is effectively included in the higher interest rate.
What is a piggyback loan and how can it help me avoid PMI?
A piggyback loan is a combination of a first mortgage and a second mortgage. For example, an “80/10/10” piggyback loan consists of an 80% first mortgage, a 10% down payment, and a 10% second mortgage. This strategy allows borrowers to avoid PMI on the first mortgage, but they will have to pay PMI on the second mortgage.
Are there any specialized programs that allow me to avoid PMI?
Yes, certain lenders and banks offer specialized programs that allow for a low down payment without PMI. These programs may target first-time homebuyers, lower-income individuals, or specific professionals. Examples include NACA, Bank of America’s Affordable Loan Solution, and CitiMortgage’s HomeRun Mortgage.
Can state or local governments help me avoid PMI?
Many state and local governments, as well as nonprofit organizations, offer programs specifically designed for first-time homebuyers with no PMI option. These programs can provide grants, tax credits, subsidized loans, or down payment assistance to help buyers reach the 20% down payment threshold and avoid PMI.
What are the pros and cons of avoiding PMI?
**Pros:**
* Lower monthly mortgage payments
* Avoid the cost of PMI premiums
* Build equity in your home faster
Cons:
- May require a higher down payment
- May have higher interest rates
- May have to pay PMI on a second mortgage (in the case of piggyback loans)
How do I know which option is best for me?
The best option for avoiding PMI depends on your financial situation and long-term goals. It is important to research and compare the different strategies, including LPMI, piggyback loans, specialized programs, and state/local homebuyer assistance programs. Consider factors such as your credit score, debt-to-income ratio, and the amount of down payment you can afford.
Can I remove PMI once I have 20% equity in my home?
Yes, once you have paid down your mortgage to the point where you have 20% equity in your home, you can request that your lender remove PMI. This is typically done through a process called PMI cancellation.