How to avoid private mortgage insurance? Mortgage insurance is very expensive and should be avoided at all costs. The bad news is that not every homebuyer can afford the required down payment which leads to purchasing mortgage insurance.
If you are buying a house you should find ways to avoid mortgage insurance. Those who own homes and still pay mortgage insurance should find a way to get rid of it. It is possible to avoid mortgage insurance and I am here to tell you how.
In this article, you are going to learn about the top 10 tips you can use to avoid mortgage insurance.
What is mortgage insurance?
Mortgage insurance a.k.a private mortgage insurance (PMI) is insurance borrowers pay when borrowing money they are not qualified for. This insurance protects the lender in case the borrower defaults on the mortgage loan. For example, if you are getting a conventional mortgage without a 20% down payment; you must purchase a PMI.
The lack of a required down payment will indicate that you are not financially fit. For this reason, lenders will be reluctant to give you money. Those who lend you money will need some protection. Mortgage insurance will do the trick.
So, how can you possibly avoid private mortgage insurance? In this article, I have put together a list of tips you can use to avoid private mortgage insurance(PMI).
1. Have a required down payment
Having a required down payment is the best way to avoid private mortgage insurance. By default, a 20% down payment is required for conventional mortgages. Other mortgages may require different down payments. If you don’t meet these requirements, you must purchase a PMI that will protect the lender.
Before you start your house-hunting journey, make sure that you have at least the minimum down payment requirement for the mortgage you will apply for. Keep in mind that lenders are always willing to give you money no matter the circumstances as long as they are protected.
You, the borrower should know your limit and borrow only what meets your financial needs. Save money first and then borrow later. Not the other way around.
If you want to learn how to save for a down payment, use the following article. It will guide you through the steps and tricks you will use to save the money you need.
Learn more: How to save for a down payment?
2. Borrow what you can afford to pay off
The best way to borrow money is to borrow what you can afford to pay off. Making a budget will be a great way to know exactly how much money you can afford to borrow.
Always remember that the house will have ongoing expenses on top of your mortgage monthly payments. Furthermore, there are other expenses to consider such as property tax, homeowners’ insurance, food, maintenance, utilities, and much more. This is why you should budget property before you embark on a journey to get a mortgage.
Without proper budgeting, you will end up borrowing more than you can afford. If you want to avoid mortgage insurance, make a reasonable budget and follow it.
The following article will walk you through steps you can use to make a budget.
Related: How to make a budget: Step-by-Step
3. How to avoid private mortgage insurance: Buy a cheap house
Most home buyers want to buy the best-looking house in a neighborhood. What they don’t realize is that the bigger and better looking, the more expensive the house gets. So, they realize this simple money concept after falling in love with the house.
At this point, there is no going back. So, they start listing ways they are going to make the money necessary. Some of them start using the following sentences.
- I love this house
- I will do anything to get this house
- We can borrow more money
- The lender said we qualify for it
- I will have a second job to get this house
- It is only a few thousand dollars
- We will be happy if we get this house
- I dreamt of this house
If a house is expensive before you buy it, it will get more expensive after buying it. Always trust your budget and your budget should be made before you find a house not after.
If you made a budget after falling in love with a house, it will not be a realistic budget. It will be a draft you made to justify the affordability of the house. You don’t necessarily need to buy your dream house now. You can always buy a cheap house and upgrade later. However, it is never a good idea to buy a very expensive house and downsize later. This is a great way to avoid mortgage insurance.
Related: Frugal Living: 19 tips that will save you money and live frugally
4. Refinance your house
What if you are already paying mortgage insurance? If this is the case for you, don’t panic. There are ways you can use to get rid of your private mortgage insurance. Mortgage refinancing is a simple technique that most homeowners use.
Mortgage refinancing simply means that you replace your current mortgage and its terms with another mortgage. This gives you a chance to secure a different mortgage with new terms under a different lender. There are always costs associated with mortgage refinancing. So, if you are considering this route as a way to avoid mortgage insurance, do your homework.
You must compare what it will cost you to refinance the house and the cost of your PMI. If you will save money in the process, then move forward with the refinance. Otherwise, it will not make sense to refinance your mortgage.
Do you want to know how to properly refinance your mortgage? Use my guide depicted in the following article.
Learn more: How to refinance a mortgage? Everything you need to know
5. How to avoid private mortgage insurance: Get a VA loan
A VA loan is a great way to avoid private mortgage insurance. VA loans require no down payment for qualified veteran members. As noted by VA.gov, the borrower will not be required to have a down payment as long as the purchase price is not higher than the appraised value.
So, if you want to purchase your dream home without purchasing mortgage insurance and meet requirements, get a VA loan.
6. Pay the house with cash
This may sound silly, but there are times when borrowers choose not to spend their money on the house. For example, you could choose to fund your business idea instead of putting down the required amount.
Whatever your reasons are, you should always try to make enough down payment or buy the house with cash. If you have cash, pay the full price and move on. This will prevent you from going through mortgage applications, mortgage insurance, and much more. In addition, the house will cost you less money due to no interest, closing costs on the mortgages, mortgage insurance, etc.
7. Find a lender with no PMI requirements
To avoid mortgage insurance, you must shop around. Many lending institutions are willing to give you money without paying mortgage insurance.
The biggest problem is knowing who these institutions are. One way to find out is to do a thorough research. You can always get answers as long as you search for it.
8. How to avoid private mortgage insurance: Get a piggyback Mortgage
Piggyback mortgages are second mortgages homebuyers take out to finance the same house at the same time. That is you will get two different mortgages as a way to avoid mortgage insurance. As reported by SmartAsset, most lenders prefer the first mortgage to be 80 and the second mortgage to be 10%. This leaves you with a down payment of 10%. This kind of mortgage combination will be denoted as 80-10-10. Other combinations (80-5-15, etc.) are also possible depending on lenders’ terms and requirements.
9. Get a doctor loan/physician loan
If you are a medical professional and meet other requirements set by the lender, you can get a physician loan a.k.a doctor loan. As noted by Rocket Mortgage, most lenders will waive the down payment and private mortgage insurance for new medical professionals due to a lot of debt they graduate with. Their debts increase their debt-to-income(DTI) ratio and make it difficult for them to qualify for money. Since lenders think that new medical graduates will make a lot of money after settling into their jobs, lenders waive their mortgage insurance and sometimes the down payment.
So, if you recently graduated from a medical field without a lot of savings, you should consider getting a physician mortgage to avoid private mortgage insurance.
10. How to avoid private mortgage insurance: Do not buy the house
If you don’t have enough down payment, wait a little longer. Postponing the purchase of a house will allow you to save for a down payment and prevent you from getting into a lot of debt. It would make sense to buy the house later than purchasing it at a high cost. This will be a clever way to avoid mortgage insurance.
Failure to have a down payment is an indication that you are not ready to buy a house.
