How to Not Pay Mortgage Insurance
Insurance coverage is a fact of life in contemporary society but you don't have to obtain it for a home purchase if you take specific steps. Eliminate mortgage insurance from your monthly payment and you'll have extra cash in your budget to pay for the myriad expenses that come with a new home.
About Mortgage Insurance
Mortgage insurance is a curious name for this type of coverage because it does nothing to insure you or your home against loss; it exists to protect your lender. Should your financial situation deteriorate while you own your home, your lender can assume the property; thus mortgage insurance kicks in to help offset the risk the lender took underwriting your purchase.
Maintain Good Credit
One of the easiest ways to avoid paying mortgage insurance is to keep your credit record clean. Show little debt and lots of fiscal responsibility when applying for a mortgage loan and your chances of avoiding mortgage insurance increase if you meet the lender's other criteria. Good credit alone doesn’t guarantee exemption, however, especially if you make a small down payment on your real estate.
Veteran’s Administration (VA) Loan
One of the biggest advantages of getting a Veteran’s Administration-backed loan is that no down payment is required of the purchaser. The VA also doesn't require homebuyers using their GI benefit to buy mortgage insurance if they successfully qualify for a mortgage loan under this program.
Put Down 20 Percent
A down payment of at least 20 percent on a conventional loan usually eliminates mortgage insurance, but if you can't put that much down, once you reduce your balance by 20 percent, your lender should drop the private mortgage insurance, or PMI, attached to the loan. A drop in the value of your home can eliminate mortgage insurance, too. If a market appraisal verifies a principal drop of 20 percent, your PMI should disappear.
Put Down 22 Percent
Apply to the Federal Housing Authority for a mortgage and avoid paying monthly insurance, the FHA’s equivalent of PMI, by putting down 22 percent of the home's selling price. You must agree to a 15-year fixed-rate loan to qualify for this exemption. Even if you put 22 percent down on an FHA loan, if the loan extends beyond 15 years, you must pay monthly insurance for at least the first five years of your mortgage.
Eliminate mortgage insurance by qualifying for a piggyback mortgage. This financial product requires excellent credit and 10 percent down. The bank gives you an 80 percent first mortgage loan plus a second, 10 percent loan -- hence the term. Piggybacks eliminate PMI, but most lenders require that a mortgagee agree to an adjustable-rate mortgage with a balloon payment down the road.
You can avoid PMI and monthly insurance by incorporating insurance fees into mortgage balances. Single financed mortgage insurance, or SFMI, requires an upfront insurance payment at closing that increases your payment, but you wind up paying less than you would making monthly PMI payments. Single premium mortgage insurance, or SPMI, requires the seller to prepay the PMI at closing. Some FHA loan originators offer split mortgage insurance, which involves similar consolidation options.
Based in Chicago, Gail Cohen has been a professional writer for more than 30 years. She has authored and co-authored 14 books and penned hundreds of articles in consumer and trade publications, including the Illinois-based "Daily Herald" newspaper. Her newest book, "The Christmas Quilt," was published in December 2011.