Avoiding Private Mortgage Insurance

Avoiding Private Mortgage Insurance

There are a few basic strategies to avoid paying private mortgage insurance (PMI). If you are purchasing a new home there are two strategies to avoid paying private mortgage insurance that don't look for you to tap into retirement and long-term investment savings:

  1. Put down 20% or more on the home that you are purchasing. Not only will this allow you to avoid paying PMI, you will also have the most loan options and most advantageous interest rates available to you.
  2. Take out a first loan for only 80% of the value of the home, and then take out a second loan for the difference between your down payment and the remainder of the 20%.

    For example, if you are purchasing a $200,000 home and have only $20,000 to put down, you would take out a first mortgage for $160,000, and then a second mortgage for $20,000 - which when added to your down payment makes up the total $200,000 purchase price.

    The main advantage to doing this is that you avoid paying private mortgage insurance, which on a $180,000 loan (the loan amount you would have had if you did not take out a second mortgage) would be approximately $936 annually or $78 per month.

    The disadvantages of doing this are:

    • The application and the closing process are somewhat more complex
    • There may be additional application fees, closing costs, or servicing charges
    • You must take the time to calculate that the cost of paying the interest payments on the two loans is actually less than paying the interest on a single loan with PMI.

If you already are paying PMI then your strategy becomes one of getting the PMI payments cancelled as soon as possible, which is as soon after you have 20% equity in your home as is possible. If you purchased your home after July 29, 1999 then the Homeowner's Protection Act (HPA) of 1998 requires your lender to automatically cancel your PMI when the mortgage is paid down to 77% or 78% of the property's original value (depending on whether or not it is designated a high risk loan). You can request that it be cancelled right after you cross the 80% threshold and not waiting for automatic cancellation. This can save you additional money.

Individuals who purchased their home prior to July 29, 1999 will need to keep track of the loan balance percentage to the original value of the home to request PMI cancellation. Some lenders do treat these people the same as those who purchased the home later, but that should not be taken for granted.

If a home has appreciated significantly in value so that the loan to current value ration is 80% or better, then the home owner should contact their lender to see if they will consider home appreciation for canceling private mortgage insurance. Some level of documentation, such as an appraisal, will be needed to demonstrate the higher property value.

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