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How to NOT pay for Private Mortgage Insurance

PMI or Private Mortgage Insurance is what you pay when you put less than 20% down on your next home. Many people don’t really understand what this is and think it’s just another fee lenders throw into the mortgage.

PMI is essentially insurance that covers the lender should you not make your payments on time or at all and the bank has to sell the property for less than it’s worth.

Most people who buy homes pay for PMI

Most people don’t have enough to cover a 20% down payment and cover closing costs as well. This is a lot of money! That amount could easily stretch into the tens of thousands of dollars. Since the down payment and closing costs are paid upfront, many homebuyers choose to put less money down and negotiate with the seller to pay closing costs.

PMI could range in price from 0.5% to 1% of the total loan amount annually. This means if you have a $100,000 loan, you could be paying up to $1,000 per year for the insurance that covers the bank’s butt.

How to get rid of PMI

PMI does not go away until you have paid off 20% of your principal balance of your loan. So, for your $100,000 loan, you would need to get the balance down to $80,000.

Keep in mind that your mortgage is amortized. This means for the first 15 years of your loan payments, on a 30-year mortgage, the majority of your principal and interest payments will go towards interest. So you’ll be paying for PMI and approximately 60-70% of your payments will be going toward interest rather than the principal balance.

Once you feel you have hit the 20% mark, don’t expect your bank or lender to come running to your door to eliminate your PMI payments. You will need to contact them and possibly get your home re-appraised since values rise and drop over the years.

Be careful what loan you get

If you get an FHA (Federal Housing Administration) loan you will ALWAYS pay for PMI. That’s right, even if you pay off 20% of your remaining principal balance, you will pay PMI for the remainder of the mortgage! Bummer. 

You would have to get a conventional loan or another loan to avoid paying PMI when you hit the 20% payoff mark. Make sure you know about this going in as it could easily save you $100 or more a month. Sometimes a lender will recommend you get an FHA loan but you won’t be able to get rid of PMI like you could on a conventional loan.

While an FHA loan has its benefits, like grants and potentially lower interest rates, it may not be better for you if you plan on staying in the home for a long time.

Discuss all options

There are pros and cons to every loan. If you need to get a grant, an FHA loan may be a good choice. But remember, PMI for life sucks. You can put down less than 20% with a conventional loan but you will have to pay PMI until you pay off 20% of your principal balance. A lower down payment on a conventional loan may raise your interest rate. Also, using a conventional loan may prohibit you from obtaining some grants if you are low on funds. You don’t have to put 20% down to use a conventional loan.

Overall, I suggest speaking with a lender, or a few lenders, to determine your best course of action. Always take into account the overall monthly payment rather than the interest rate. A lender can easily tell you they’ll get you a lower interest rate than a competitor but wrap fees in your mortgage so you pay more.

Many lenders will have your best interests in mind but there are some bad apples out there who only have their commission check in mind.

Overall, if you are looking to shop for a loan, an FHA loan can be a good bet if you’re looking to get a grant to cover costs upfront. The cons of an FHA loan are you have PMI for life.

A conventional loan will allow you to eliminate your PMI once you pay off 20% of your principal balance. Shop around and see who gives the best rates and payments!

Are you looking to refinance your home or purchase a new home? Comment Below

 

 

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