Last updated on February 24th, 2019 at 09:24 pm

Last Updated on February 24, 2019 by

If you buy a home and put less than 20% down against the purchase price, you will probably be required to pay PMI (private mortgage insurance). There are some exceptions to the general rule e.g VA loans. For some time after the late 2000’s real estate collapse, loans with less than 20% down faded away.

There were special circumstances loans e.g. VA but many others stopped issuing them. Almost every optoon that was available in 2006-2007 at the peak of the housing boom is back. Including zero down loans, loans with grant help and the most popular requires just 3.5% down.

The major difference is that you must now provide evidence of your source of income to repay the loan. In other words you need a job or sufficient income from reliable sources e.g. Social Security, pension funds etc.

While the zero down and low down loans are back, PMI never went away. This means that people with little or no cash to buy a house will have to pay for private mortgage insurance to secure the loan. The theory is that the more you invest of your own money the more secure the loan. There is history to prove this theory correct.

PMI payments can be the difference between affording the loan and not be able to buy. The monthly cost is added to your mortgage payment. To calculate what PMI would be do the following:

  • Mortgage amount
  • Divide mortgage amount by 100
  • Divide the answer above by 12
  • The answer is your monthly PMI

FHA who offers the 3.5% loan program and others will no longer allow PMI to drop off after the homeowner reaches 78% unless they put down more than 10%. In the case with more than 10% down, PMI can drop off if requested after 11 years.

Now that you understand the idea of PMI and the cost then how would you avoid paying it? You can avoid paying PMI if you put 20% down on the loan or you obtain a loan with 10% down and a second montage at the same time in the amount of 10% which to the first mortgage lender indicates you have put down 20%.

You can refinance your home when you have at least 20% equity but that has costs with it. Generally the costs can be financed so your mortgage payment will be lower but it adds to the back end of your mortgage. This will not however help you if you are in the buying process.

In this scenario above you will have two payments. One for the first mortgage and one for the second mortgage but you will not have PMI. This type of loan is unconventional because the first mortgage loan will have the best interest rate based upon your credit while the second mortgage will have a higher interest rate and perhaps a variable rate. Adding the two together would still generally produce a lower mortgage payment than if you were paying PMI.

Another approach is to pay for the cost of the PMI up front. Just like any insurance policy you can pay for it upfront and save finance charges or you can pay for it over time. You can add the cost of PMI to your loan and while the loan will increase the monthly payment will be lower than with PMI.

The above approach can be crafted by a good Realtor to include the seller paying the cost of the PMI for you without adding to the price of the home. Some sellers will give concessions and if the law permits (there is a limit to concessions given by sellers) they can pay this cost for you. This is my favorite plan to avoid PMI.

In effect, no one truly avoids PMI, it’s just that there are other ways to pay for it rather than in the monthly payment. If you would like more information about how to craft a purchase agreement and finance without PMI, feel free to contact me. Use our resources page and talk to Brian with CMG Financial his contact information is located on the resources page.