3 Little Known Secret Ways You Can Avoid Private Mortgage Insurance
09/15/2010 If your mortgage down payment covers less than 20% of the total price of your home purchase, you are required to pay for private mortgage insurance, typically abbreviated as PMI. The premium payments can add a significant cost to your monthly mortgage expense. Luckily, there are ways to avoid PMI, even if your down payment is minimal. Three of the most common ways of avoiding PMI are outlined below.
1. Take out a second loan. If you're unable to make a 20% down payment, simply take out a second loan slightly before the first and add the money from this loan to the down payment amount. This is a very common method of avoiding PMI. The trouble with this method is that you end up making payments on two loans each month, but if you're able to consolidate both loans at a low rate, this may save you significant money. You'll also save money because the higher down payment will allow you to start your mortgage with one of the best mortgage rates available. Over time, you'll save a great deal of money due to this low interest rate.
2. Ask the lender to pay for it. Sound crazy? It's not. Lenders will often agree to pay your PMI premiums in exchange for a slightly higher interest rate on the loan itself. This higher rate will likely cost you more money in the long run, but it will save you significant money in the short term. This option might be best if you have a low credit score and are unable to take out a second mortgage, because your primary mortgage lender has already agreed to give you a loan. This method leverages that established relationship.
3. Pay it all at once. You might be able to pay for the full cost of all your monthly PMI premiums at the outset of the mortgage, at closing. What's the advantage of this? You can roll the cost of the PMI directly into the loan balance. Your monthly payment remains fairly low, since you're paying for the PMI over the course of the entire loan term. Again, however, the higher loan balance will cost you more in interest over time, so you won't save money in the long run. This will make it more difficult for you to refinance in the future because your loan amount will be higher than the value of your home. In the short term, however, all of these strategies are excellent ways to avoid PMI.
