Mortgage Insurance Options when Putting Less than 20% Down
Posted: 2019-10-05 | Author: Ricahrd Simon
When financing the purchase of a home, it is ideal for buyers to come up with at least a 20% down payment. With 20% down, there is less to finance, which means a lower monthly mortgage payment. You also take ownership with more equity in the home, which is an asset you have available to borrow against later on in the case of an emergency. Finally, those who put at least 20% down do not have to purchase private mortgage insurance (PMI), a product that insures the lender against the risk of the borrower defaulting.
Although there are a lot of good reasons to go into a home purchase with a 20% down payment, this goal is very difficult to reach for a large number of prospective home buyers. It could take years to save up enough, and a buyer is generally better off getting into a house sooner, even if they have to do it with a lower down payment. But what about the private mortgage insurance?
PMI is extra money every month tacked onto the cost of the loan, just to provide insurance to the lender. This is like money wasted, and it could add up to thousands of dollars if you have to pay for this insurance for even just a few years.
What Mortgage Insurance Options Are Available When I Put Less than 20% Down?
If you cannot come up with 20% to put down to buy a house, you have a few different options for dealing with the mortgage insurance. The first option is to bite the bullet and pay the PMI. Yes, it is essentially money being thrown away, and it can be $100 or $200 or more every month; but it also gets you into a home sooner, and it does not have to stay around forever. You can have the private mortgage insurance removed after you have obtained at least 20% equity in the home.
If you want to avoid PMI altogether, here are some routes you can take:
- Piggyback Loan: One way to get around private mortgage insurance is through “piggyback financing.” This means taking out two loans at the time you purchase the home. The typical arrangement would have you bringing a 10% down payment, financing 80% with your first mortgage, and taking a second mortgage/home equity loan for the remaining 10% (80/10/10). If you can come up with 10% to put down, this might be a good option. However, keep in mind that the 10% second mortgage will be at a higher interest rate than your first mortgage, so you will have to decide whether the bump in the interest rate will be worth the trade-off of not having to pay PMI.
- Lender Paid Mortgage Insurance (LPMI): You could take out a mortgage in which the lender pays the mortgage insurance. These types of loans are available even with down payments as low as 3%. But the trade-off here is that you will have to pay a higher interest rate for the life of the loan. This might work out okay if you do not plan on being in the home very long, or if you are able to finance at a better rate once you have more than 20% equity in the home. However, if you keep the mortgage for 15 or 30 years or whatever its length is, you could end up paying a lot more this way.
- Loan Programs without PMI Requirement: There are home loan programs out there that do not require private mortgage insurance. For example, if you are active military or a military veteran, a VA loan might be a great option. VA loans allow you to purchase a home with no down payment, and they do not require PMI. If you do not qualify for a VA loan, other various lenders, banks, and credit unions create their own no-PMI programs from time to time. Check with your local lending specialist to find out what programs are available in your area, and which option is best for your situation.