How Can I Avoid Paying PMI?

Taking out a mortgage in order to buy a home isn’t an uncommon thing to do. In fact, most homebuyers require a home loan in order to purchase property. However, you should understand that there are a lot of different costs involved with purchasing a mortgage – including a monthly PMI. Fortunately, there are a few ways that you can avoid having to pay that extra monthly PMI cost.

What is a PMI?

PMI, or private mortgage insurance, is often required by lenders to help protect them against a financial loss if you can no longer make mortgage payments and your house is foreclosed on. Because most foreclosed properties tend to sell between 20 and 30 percent below their appraised value, the PMI exists to ensure that lenders don’t take a loss.

There are a lot of factors that go into determining how much you have to pay for your PMI, including your credit score and the size of your down payment. Typically, PMI costs will be between 0.3 percent to 1.5 percent of your original loan amount per year.

How Can You Avoid Paying a PMI?

If you want to keep your monthly mortgage costs down as much as possible, then you’ll want to do what you can to avoid having to pay a PMI. The following are a few ways that you can avoid having to pay PMI:

  • Make a down payment of at least 20 percent on the home – Anything less than 20 percent, and your lender will require PMI payments.
  • Pay off your loan’s principal balance by 80 percent – Once your loan’s principal balance has dropped to 80 percent of the property’s current market value or 80 percent of the original home appraisal, the PMI can be cancelled.
  • Take out a VA loan – If you are or were a military service member, then you can apply for a VA (Veterans Affairs) loan. VA loans will never charge a PMI, no matter what your LTV (Loan To Value ratio) is.
  • Choose an LPMI – Some lenders will give homebuyers the option of an LPMI (Lender Paid Mortgage insurance). An LPMI is very similar to a regular PMI – the only difference is that the lender will pay the PMI on your behalf. In order to choose this option, you’ll most likely have to accept a mortgage rate increase of upwards of 0.75 percent. Just keep in mind that the lender will never cancel the LPMI no matter what your principal balance is, whereas you have the opportunity to cancel your PMI once you have at least 20 percent equity in the house.
  • Choose piggyback financing – Piggyback financing requires you to make a ten percent down payment, but instead of taking out one mortgage, you take out two – one for 80 percent and one for ten percent.

These are a few ways that you can avoid paying PMI. Be sure to contact Alex Echeandia today for more information about PMI and what options best suit your particular needs.

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