Unlocking Property Investment: No Pmi, All Equity

Private mortgage insurance (PMI) is a type of insurance that some lenders require borrowers to pay when they take out a conventional loan to buy a home with a down payment of less than 20%. PMI can add hundreds of dollars to your monthly mortgage payment, but there are ways to avoid it. For example, you can opt for a government-backed loan, such as a Federal Housing Administration (FHA) loan, or a Veterans Affairs (VA) loan, which often have lower down payment requirements and may not require PMI. Alternatively, you can make a 20% down payment, or take out a piggyback loan, which involves taking out a second mortgage or home equity loan at the same time as the first mortgage. With an 80-10-10 piggyback mortgage, for instance, 80% of the purchase price is covered by the first mortgage, 10% is covered by the second loan, and the final 10% is covered by your down payment. This lowers the loan-to-value (LTV) ratio of the first mortgage to under 80%, eliminating the need for PMI.

Lender-paid mortgage insurance (LMPI)

Lender-paid mortgage insurance (LPMI) is an option for borrowers who cannot afford a 20% down payment on a home. In this arrangement, the lender covers the cost of the mortgage insurance, which is reflected in a slightly higher interest rate on the loan.

LPMI works by increasing your mortgage rate. The amount by which your rate increases depends on several factors, including your credit score and down payment amount. For example, a lender may add a quarter of a percentage point to your loan rate, increasing it from 6% to 6.25%. On a mortgage with a principal of $100,000, this would represent an additional $16 per month on your mortgage payment.

The cost of LPMI is expressed as an interest rate percentage, such as an additional 0.25%. The higher your credit score and down payment, the lower your LPMI costs will be. For instance, a lender might charge you an additional 0.25% if you can put 10% down. If you can only manage a 5% down payment, your LPMI could be as much as 0.5% higher.

LPMI has both benefits and drawbacks. On the one hand, it can result in lower monthly payments than private mortgage insurance (PMI) and provide greater benefits for borrowers with higher credit scores. It can also increase your approval odds for a mortgage and is tax-deductible. However, LPMI is only offered by select lenders, and the higher interest rate remains for the life of the loan. Additionally, LPMI can be more expensive in the long run, especially if you stay in your home for a long time.

To get rid of LPMI, you need to refinance or pay off your mortgage. If you refinance before reaching 20% equity in your home, you may still need to pay mortgage insurance on your new loan.

Government-backed loans

For example, FHA loans require a mortgage insurance premium (MIP) instead of PMI. MIP is similar to PMI and gives lenders the same protections if you default on your loan. However, you must pay for MIP at closing and each month, and you must also pay MIP for the life of the loan if you have less than 10% down. If you put 10% down, you pay MIP for 11 years.

VA loans are another option for those who are veterans or active-duty service members. These loans are guaranteed by the Department of Veterans Affairs and offer significant benefits, including no down payment requirement. Additionally, the VA's backing of these loans often results in more favourable mortgage interest rates and terms compared to conventional loans. However, you'll have to pay a one-time upfront funding fee, which varies between 1.4% and 3.6% of the loan amount.

While government-backed loans can help you avoid PMI, it's important to consider the overall financial implications. You may end up paying more in other fees or charges, so be sure to carefully review the loan terms and eligibility requirements before deciding.

Avoiding PMI with a high down payment

Private mortgage insurance (PMI) is a type of insurance that lenders require homebuyers to pay when they make a down payment of less than 20% of the home's value. It protects the lender in case the borrower defaults on the loan. While PMI enables buyers to get a mortgage with a lower initial down payment, it adds an extra cost to their monthly mortgage payment. Therefore, homebuyers may want to avoid paying PMI.

One way to avoid paying PMI is to make a 20% down payment. For example, if a home costs $300,000, a buyer would need to put down at least $60,000 to avoid PMI. This option reduces the loan-to-value (LTV) ratio to 80%, which is the threshold at which PMI is typically required.

Another option to avoid PMI is to take out a piggyback loan, also known as an 80-10-10 loan. In this scenario, the buyer takes out a first mortgage for 80% of the home's purchase price, a second mortgage or home equity loan for 10%, and covers the remaining 10% with a down payment. This lowers the LTV ratio of the first mortgage to below 80%, eliminating the need for PMI.

Additionally, buyers can opt for lender-paid mortgage insurance (LPMI), where the cost of PMI is included in the mortgage interest rate. However, this often results in a higher interest rate for the life of the loan. While this technically avoids PMI, it increases the overall cost of the loan.

Government-backed loans, such as Federal Housing Administration (FHA) loans or Veterans Affairs (VA) loans, may also be an option to avoid PMI. These loans often have lower down payment requirements and may not require PMI. However, they have their own eligibility criteria and may have other associated fees.

It is important to consider the overall financial implications of avoiding PMI. While there are strategies to circumvent PMI, they may result in higher interest rates, additional fees, or other indirect costs. Homebuyers should carefully weigh the benefits and drawbacks of each option before making a decision.

Removing PMI with a home re-appraisal

If you have a conventional loan and own 20% equity in your home, you can contact your lender to see if they can cancel your mortgage insurance. If your mortgage has lender-paid mortgage insurance, you will need to refinance your loan to get rid of your insurance payments.

Understanding PMI

Private mortgage insurance, commonly known as PMI, is a type of insurance that lenders require from borrowers who pay a down payment of less than 20% of the home's purchase price. It is a cost borne by the borrower, and it serves as protection for the lender in case the borrower defaults on their mortgage payments.

Removing PMI

There are several ways to remove PMI from your monthly payments:

• Automatic PMI cancellation: Some loans automatically end PMI when you hit the halfway point of your loan. This usually happens when you attain a specific loan-to-value ratio, which is when your mortgage balance reaches 78% of your house's purchase price.
• Request PMI cancellation: You can request to cancel PMI when your loan balance reaches 80% of your home's original value.
• Pay down your mortgage earlier: If you have the cash to spare, you can make bigger or extra mortgage payments to help you hit the 20% equity faster.
• Refinance your mortgage: You can refinance into a loan that doesn't require PMI, such as a government-backed USDA or VA loan. However, keep in mind that other fees and eligibility criteria may apply.
• Reappraise your home: If your home's value has increased due to market trends or property upgrades, you may be able to cancel PMI. You will likely need to pay for a home appraisal to verify the new market value.
• Expand or renovate your home: While it may not be financially wise to add onto your home just to get rid of PMI, significant improvements can increase your home's value and help you reach the 20% equity threshold.

The Appraisal Process

To remove PMI through a home re-appraisal, you will need to understand the appraisal process and when to consider a home appraisal. A home appraisal is advised when there has been an increase in your home's value or when you have undertaken significant home upgrades. You will need to engage a certified appraiser to get a comprehensive property assessment.

Working with AmeriMac

AmeriMac can assist you throughout the appraisal process and provide expert advice on home valuations, making the process of removing PMI smoother.

Removing PMI by refinancing

If you have a conventional loan and lender-paid mortgage insurance (LPMI), you will need to refinance your loan to stop paying mortgage insurance. LPMI requires you to pay a higher interest rate in exchange for the lender covering your mortgage insurance. However, LPMI remains for the life of the loan, and you will continue to pay the same interest rate even after reaching 20% equity in your home. Therefore, refinancing is the only way to get rid of LPMI.

• Reach 20% home equity: You must have at least 20% equity in your home before refinancing. Otherwise, you will need to pay PMI again on the new loan.
• Compare lenders: You are not obliged to refinance with your current lender. You can shop around and compare different lenders' offers to find the best deal.
• Apply for refinancing: Submit your application, financial documentation, and respond promptly to any inquiries from the lender. Remember to specify that you want to refinance into a conventional loan.
• Wait for underwriting and appraisals: Once you apply, the lender will initiate the underwriting process, where a financial expert will review your documents to ensure you qualify for refinancing. They will also schedule a home appraisal.
• Acknowledge the Closing Disclosure: After underwriting and appraisal, the lender will send you a Closing Disclosure document outlining your new loan terms and closing costs. Make sure to acknowledge this promptly, as the lender cannot schedule the closing until you have done so.
• Attend the closing: At the closing, you will pay the closing costs and sign the new loan agreement. From then on, you will make payments to the new lender.

It is important to carefully consider the costs and benefits of refinancing, as closing costs can be significant, and you may end up with a higher interest rate than your current loan.

Frequently asked questions