Avoiding PMI - Quicken Loans Zing Blog

This is a guest post from Quizzle. Read the original article here.

Unless you’ve been living under a rock for the past few years, you know that home buyers today are fortunate to have the opportunity to be able to take advantage of near historically low mortgage interest rates. After the onset of the recession in 2008, rates on home loans dipped to around 4%, and in the past year have dropped even lower but are inching back up. To put this in perspective, when my parents bought their first house in 1982, they paid 16.5% interest on their mortgage. Oh how times have changed!

But many would-be buyers face a conundrum: they have good credit and want to take advantage of rock-bottom rates, but they don’t have enough saved to provide the traditional 20% down-payment on their first place. And 20% down is key, because this is the magic number that allows homeowners to avoid the dreaded private mortgage insurance (PMI).

So What Is PMI Anyway?

Basically, it’s an insurance policy that lenders will force you to take out to protect them in the case that you default on your mortgage. If you’re only putting, say, 5% down on your mortgage, that basically means that the bank you’re borrowing the money from is taking on 95% of the risk of the loan. Most banks are uncomfortable with this and will require you to purchase PMI to protect them in the event that you don’t pay on your mortgage. PMI can add a substantial sum to your monthly costs, usually a few hundred dollars. This is why putting down 20% is ideal, because in this case the bank is only taking on 80% of the risk and most won’t require you to purchase extra insurance.

The good news, though, is that there are options for avoiding PMI even if you can’t put down 20%. With as little as 5%, you may be able to avoid this money pit and get into the home of your dreams while interest rates are still at rock bottom. Consider:

Looking Into Special Programs

In order to create some good karma within the areas they serve, many banks offer special, first-time home buyer programs in specific neighborhoods. Often referred to as “community” mortgage programs, they frequently allow for low down-payments and waive PMI for those with good credit. When you begin looking for a mortgage, be sure to ask potential lenders about these opportunities.

“Buying Out” Your PMI with a Slightly Higher Interest Rate

In an effort to attract credit-worthy customers who lack the cash to put down 20% but also don’t want to pay PMI, many large banks offer the option to “buy out” the PMI on a mortgage in exchange for a slightly higher interest rate. Usually, the rate bump is around half a percentage point, meaning that the borrower pays about .5% more on his mortgage than he otherwise might in exchange for dodging PMI. In most cases this makes much more sense than paying PMI, which would cause a significantly higher monthly payment than a minor interest rate increase.

Credit Unions

Due to their non-profit nature, credit unions often offer cost-reducing options on mortgages that traditional banks don’t, including waiving PMI for customers with good credit. Be sure to shop around when you’re looking for a mortgage and keep credit unions on your radar – you might be surprised at the money you could save by going with a slightly less conventional route.

Avoiding PMI is possible, so don’t believe the hype that 20% down is an absolute “must” when obtaining your first mortgage. Remember: everything’s negotiable, so don’t be afraid to ask a Home Loan Expert for options to avoid paying more than you absolutely must!

 

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This Post Has 26 Comments

  1. We currently have an FHA loan and are going to be selling, we will not get much for our little home and hope to break even. We are currently looking at other homes and do not want PMI, would be still be required to put 5% down to avoid those fees?

    1. Hi Melissa:

      To completely avoid mortgage insurance payments, you would have to put 20% down and it has to be a conventional loan. However, if you go with a conventional loan for your next home, you can take a look at a lender-paid mortgage insurance program like PMI Advantage. In exchange for taking a slightly higher rate (compared to putting 20% down or paying PMI yourself), your lender pays for the mortgage insurance policy up front and you avoid that monthly charge. If you do choose to continue making the mortgage insurance payments on a conventional loan, you can request the mortgage insurance payment comes off once you reach 20% equity provided you meet certain conditions. Otherwise, it automatically comes off once you reach 22% equity. With an FHA loan, unless you make a down payment of 10% or more, it never comes off. If you do make the higher down payment, you still have to pay the premiums for 11 years.

      Hopefully, this helps clarify things. If you’d like to look at your options for preapproval online, you can do so through Rocket Mortgage. Otherwise, one of our Home Loan Experts would be happy to take your call at (888) 980-6716.

      Thanks,
      Kevin Graham

  2. Hello, we want to build our home and are trying to avoid PMI, but we only have 10% down. We have never missed a payment on our home and we have credit scores over 720. I spoke with two local banks who require 20% down or we will have to pay hundreds a month in PMI. Any ideas on how we can avoid PMI with only 10% down?

    1. Hi Erin:

      We only do loans on homes that are already built, however, I can give you some general advice. You can avoid PMI by opting for lender-paid PMI. Otherwise, you will have to pay it unless you have 20% down. Most mortgages are originated and then backed by investors that have very strict requirements in terms of the mortgages they will ensure. PMI is one of those requirements. I strongly advise looking at LPMI. Hope this helps!

      Thanks,
      Kevin Graham

  3. I’m going fha on a town home I’m putting down at least 20 percent and have a credit score of 740 do i have to have pmi insur they said i had to is that true ? Dawn

    1. Hi Dawn:

      On any FHA loan, you have to pay mortgage insurance for 11 years regardless of your down payment. Unfortunately, it’s a government requirement.

      Thanks,
      Kevin Graham

    1. Hi Brian:

      That’s certainly something you can take a look at. There’s no PMI on VA loans. You just pay a funding fee that’s a fixed percentage of the loan amount. You can use Rocket Mortgage to get an online approval customized to your goals or get started on the phone by calling 888-728-4702.

      Thanks,
      Kevin Graham

  4. My wife and I are looking at purchasing our first home. We both have credit scores above 800. There is a program in our state that provides 10% (up to $20,000) grant money for down payment. Is there a way for us to avoid the PMI?

  5. I am planning to buy a house with 15% down payment and want to avoid PMI. Can I take another loan for that 5% or is there some other way. Please guide.

    Thanks,
    Varun

    1. Hi Varun:

      We don’t do 15-5 loans, but there may be other ways to avoid monthly PMI payments by taking a look at something like PMI Advantage. I’m going to have someone reach out to help you go over your options.

      Thanks,
      Kevin Graham

  6. I have had my mortgage with Bank of America for at least 8-9 years and never had a late payment because I set up a bi-weekly draft. At the onset of the mortgage, they required PMI. But I can’t seem to get them to drop it now. Any recommendations?

    1. Hi Michael:

      Getting rid of PMI only has a little bit to do with never having a late payment. It has much more to do with the amount of equity you have in your home. I’m going to have someone reach out to you to look into your situation and see if we can offer you any advice for dropping PMI based on your current equity.

      Thanks,
      Kevin Graham

  7. The builder KB Home with whom we’ve had a contract with for 7 months called us to say that they won’t be building our home because their pulling out of the DC area (D.C., Maryland and Virginia). The other new home we were considering has gone up $25,000 on their base price and we can no longer afford that home with mortgage insurance. We are FHA buyers and not first time home buyers. Is there anything you can do? Their mortgage company isn’t aware of any programs to do this so if we can do it they will allow us to use an outside lender.

    1. Hi Hope:

      If you can qualify for a conventional loan, you may be able to avoid paying PMI. With FHA, there’s really no avoiding paying mortgage insurance. However, we can help you work and all your options. Someone will be reaching out.

      Thanks,
      Kevin Graham

    1. Hi Shanae:

      If you’re going with an FHA loan, MIP is hard to get rid of. I’m going to have someone reach out and look into any options you may have.

      Thanks,
      Kevin Graham

  8. You mention these things for first time home buyers. Are these options typically available for current home owners looking to purchase a new home?

    1. Hi Karen:

      Some of the state programs may be restricted to first-time home buyers. There are ways to avoid PMI if you’re looking to buy a new house as a current homeowner. I’m going to have someone reach out to you to go over your options.

      Thanks,
      Kevin Graham

    2. Hey karen,

      I wanted to mention that I attended a first time home buyer seminar provided by HUD in Florida. They explained that as defined by “First time” home buyer was someone who had not purchased a home within the past 3 years. Even if they had purchase a home before, they could still qualify. It can vary from state to state, but it’s worth a look. There are also city and county programs that provide down payment assitance.

      Best of luck!

      1. It’s true that in many cases a first happened time home buyer is considered one that hasn’t purchased property in the last three years. States may also have different policies.

    1. Hey David:

      You’ve come to the right place. I’m going to get you to someone that can answer any questions you may have.

      Thanks,
      Kevin Graham

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