Four Ways To Avoid Mortgage Insurance Even with Less Than 20% Down Payment
Mortgage insurance, sometimes referred to as private mortgage insurance, is required by lenders on conventional home loans if the borrower is financing more than 80% Loan-To-Value for his home. It is insurance to offset losses in the case where a borrower is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.
Private Mortgage Insurance (PMI) simply protects your lender against non-payment should you default on your loan. It’s important to understand that the primary and only real purpose for mortgage insurance is to protect your lender—not you. As the buyer of this coverage, you’re paying the premiums so that your lender is protected. PMI is often required by lenders due to the higher level of default risk that’s associated with low down payment loans. Consequently, its sole and only benefit to you is a lower down payment mortgage
Thanks to The Homeowner’s Protection Act (HPA) of 1998, borrowers have the right to request private mortgage insurance cancellation when they reach a 20 percent equity in their mortgage. What’s more, lenders are required to automatically cancel PMI coverage when a 78 percent Loan-to-Value is reached.
However, there are some ways in which you can avoid paying monthly mortgage insurance premium.
Lender Paid Mortgage Insurance (LPMI) – A borrower is typically charged a higher interest rate by up to 0.375%. In exchange of this, there is no monthly mortgage insurance premium required.
Financed Mortgage Insurance Premium – In this case a one time premium is added to the loan amount. For example if your loan amount is $400,000 and a one time premium is 2%, your loan amount would end up as $408,000. But then, you never pay for mortgage insurance later.
80/10/10 Loan – In this case one 90% loan is structured as 80% first mortgage and 10% second mortgage, thus avoiding mortgage insurance. Downside could be higher rate on the first and variable rate on the second.
VA Loan – This is not a conventional loan. But if you qualify for a VA loan, there is no monthly mortgage insurance. You pay a one time funding fees that can be added to the loan amount.