PMI: it sounds like another one of those three letter acronyms that you might have heard in passing that you never really gave much thought. But if you’re mortgage shopping, it’s extremely important that you understand exactly what PMI is and why you should give serious consideration to avoiding it. You don’t want to commit to a mortgage loan without having comprehensive knowledge of all of the possible costs and fees associated with it, and understanding PMI is a big part of seeing the whole picture. Let’s talk about PMI and what you can do to avoid it.
So, What Is PMI?
PMI, or private mortgage insurance, is essentially a protective fee assessed by a lender if they determine that your loan may be risky and susceptible to defaulting. This is typically imposed if you cannot put down the usual down payment of 20% of the total price of the home up front.On average, the fee that is associated with PMI is 0.5%-1% of the total loan amount yearly. While this may seem like a relatively small amount on a $180,000 home loan, private mortgage insurance would stack an additional $900-$1800 onto your mortgage payment annually. If you get stuck with a PMI payment, you are usually obligated to pay that additional annual amount for over three-quarters of the loan life; PMI isn’t terminated until 78% of the mortgage is paid off. In other words, once you’re committed to a PMI payment, you’re often stuck with it for awhile.
How Can I Avoid PMI?
If you find yourself in a position where you can’t afford the full 20% down payment on a home, you can avoid PMI. The obvious option is to find a cheaper home that you can afford with a 20% down payment. However, that is not always the desired or realistic solution. Another common and effective way to avoid PMI is to take out something called a “piggyback loan”. A piggyback loan is a smaller, higher interest loan that covers the remainder of the down payment on your prospective home, this allows you to pay the lender’s desired down payment, avoiding PMI.
It might seem illogical to replace a relatively low-fee mortgage insurance payment with a high interest loan, but a piggyback loan is short-term and the interest on the loan is almost always tax deductible. Even at a high interest rate, the total payments made on a short, smaller loan are unlikely to amount to the total spent on PMI year after year. This makes piggyback mortgage loans a desirable alternative to PMI if you are not in a financial position to put down a full down payment on your own.
If neither of these options seem ideal, there is a third option: HRCCU offers a special deal on our mortgages that include up to 95% financing with no PMI. If you get a mortgage with us, you can avoid the stress of PMI or a piggyback loan, while still benefiting from the fair and competitive rates we pride ourselves on. If you are considering buying a home, check out our related blogs, “5 Steps to Mortgage Approval” and, “3 Essential Tips For First-Time Home Buyers”.