Useful Ways To Avoid And Lower Private Mortgage Insurance
There are many types of mortgage insurances, but the one that most borrowers worry about the most is private mortgage insurance (PMI). This insurance is basically to protect lenders in case borrowers fail to pay them back.
The reason you need to pay private mortgage insurance (PMI)
If you as a borrower pay less than 20% of the cost of your house as down payment, it poses a higher risk to your lender.
Calculating loan to value (LTV) ratio
Whether you require to pay PMI or not is determined by calculating the loan to value (LTV) ratio. If you take the current value of your home and compare it with the amount of the loan you’re taking, you will get your loan to value ratio. This ratio needs to be less than 80% if you want to avoid making the PMI payments.
Avoiding private mortgage insurance
If you wish to avoid private mortgage insurance payments, you need to ensure you pay the required 20% down payment on your dream home. But if you’re already paying PMI, you will need to wait till your home equity builds up and rises above the 20 percent limit to stop paying the PMI. Once the PMI cancels, your monthly repayment amount also reduces.
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Ways to avoid paying for private mortgage insurance
If you simply put in 20% as down payment, you can completely avoid paying private mortgage insurance. However, if you can’t afford to pay the PMI, here are some ways you can use to avoid it.
- Affordable loan solutions: This type of conforming loan comes with a down payment of 3% without any mortgage insurance.
- VA loans: VA loans do not have any private mortgage insurance bundled with them. However, only qualified veterans can apply for this type of loans.
- Higher interest rates: You can also avoid PMI by paying a higher rate of interest. If you pay higher interests on your mortgage, it will still turn out to be less than what you might pay for PMI.
- Non-conforming loans: Some lenders also offer non-conforming loans with no PMI and less down payment.
- Service to the people: Teachers and doctors usually get special loans that don’t carry private mortgage insurance.
- Piggyback : Another way to avoid paying for private mortgage insurance altogether is to take a smaller loan to pay the required 20% down payment
The above ways can help you avoid paying PMI. Also, you know know that there are certain ways of paying lower PMI. For example, a high down payment and high credit score result in a low PMI. Fixed rate mortgages come with low PMI as compared to adjustable rate mortgages. And if you plan to live in the property you buy, the PMI will be less, as compared to if you want to rent it out.
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