How To Avoid PMI
You may be wondering if there’s a way to avoid PMI. Luckily, you can get out of paying for it, but it’ll depend on which type you have, borrower-paid or lender-paid.
Let’s review what steps you can take to avoid paying either one.
How To Avoid Borrower-Paid PMI
There are a few ways you can avoid adding a PMI expense to your monthly mortgage payment, including making a down payment of 20% or higher, taking out a specific type of mortgage loan or taking out a piggy-back loan.
Make A Large Down Payment
You can avoid BPMI altogether with a down payment of at least 20%, or you can request to remove it when you reach 20% equity in your home. Once you reach 22%, BPMI is often removed automatically.
Take Out An FHA Or USDA Loan
While it’s possible to avoid PMI by taking out a different type of loan, Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans have their own mortgage insurance equivalent in the form of mortgage insurance premiums and guarantee fees, respectively. Additionally, these fees are typically around for the life of the loan.
The lone exception involves FHA loans with a down payment or equity amount of 10% or more, in which case you would pay MIP for 11 years. Otherwise, these premiums are around until you pay off the house, sell it or refinance.
Take Out A VA Loan
The only loan without true mortgage insurance is the Department of Veterans Affairs (VA) loan. Instead of mortgage insurance, VA loans have a one-time funding fee that’s either paid at closing or built into the loan amount. The VA funding fee may also be referred to as VA loan mortgage insurance.
The size of the funding fee varies according to the amount of your down payment or equity and whether it’s a first-time or subsequent use. The funding fee can be anywhere between 1.25% – 3.3% of the loan amount. On a VA Streamline, also known as an Interest Rate Reduction Refinance Loan, the funding fee is always 0.5%.
It’s important to note that you don’t have to pay this funding fee if you receive VA disability or are a qualified surviving spouse of someone who was killed in action or passed as a result of a service-connected disability.
Take Out A Piggyback Loan
One other option people look at to avoid the PMI associated with a conventional loan is a piggyback loan. Here’s how this works: You make a down payment of around 10% or more and a second mortgage, often in the form of a home equity loan or home equity line of credit (HELOC), is taken out to cover the additional amount needed to get you to 20% equity on your primary loan. Rocket Mortgage® doesn’t offer HELOCs at this time.
Although a HELOC can help avoid the need for PMI, you’re still making payments on a second mortgage. Not only will you have two payments, but the rate on the second mortgage will be higher because your primary mortgage gets paid first if you default. Given that, it’s important to do the math and determine whether you’re saving money or if it just makes sense to make the PMI payments.
How To Avoid Lender-Paid PMI
There’s no way to avoid paying for LPMI if you have less than a 20% down payment. You can go with BPMI to avoid the higher rate, but you still end up paying it on a monthly basis until you reach at least 20% equity. In that case, you’re back to the original amount from the BPMI scenario.
