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Many home buyers find it difficult to provide
the required 20% down payment and are forced to pay private mortgage
insurance, or PMI, in order to buy a home. Private mortgage
insurance solves the down payment problem but creates another two:
it increases monthly payments and on top of that it may not be tax
deductible if you itemize deductions. Fortunately, there is more
than one way to get your desired home without having the 20% down
payment and avoid PMI at the same time.
USDA Loan
Up to 100% financing with a USDA Loan with no private
mortgage insurance.
Learn more about the USDA Loan.
Federal VA Loan
Up to 100% financing with a Federal Loan with no private
mortgage insurance.
Learn more about a Federal VA Loan.
Terminating PMI When You Already Have One. The use of private
mortgage insurance has been a great way to make it possible for a
borrower to buy a home with less than 20% down payment and give the
lender insurance in case the borrower defaults on the home loan.
However since PMI payments can be significant, the borrower starts
to ask himself/herself how to get rid of those payments.
The Homeowner's Protection Act includes rules for automatic
suspension of PMI payments and cancellation of PMI when 22% equity
in the borrower's home is reached. Those rules apply to mortgages
signed on or after July 29, 1999, and exclude government-insured FHA
or VA mortgages that are considered high-risk to default. This is
why a conventional loan has a huge advantage over government insured
loans.
Additionally, disregarding the time when the mortgage was signed,
the borrower may ask for PMI termination once s/he exceeds 20%
equity.
Avoiding Private Mortgage Insurance with a Piggyback Loan.
Piggyback loans are a very popular way of avoiding private mortgage
insurance. It consists of taking a loan (first mortgage) covering
80% of the sale price of the home and taking and placing additional
5%, 10% or 15% on a second mortgage. A combination of 80% first
mortgage, 5% second mortgage and 15% down payment is referred to as
80/5/15. Accordingly, the other two loan combinations are 80/10/10
and 80/15/5.
Although second mortgages generally have higher rates, in the end
the borrower may save money because in contrast to PMI payments, now
the loan payments are tax deductible.
Choosing to Finance Single Premium Option over monthly
Private Mortgage Insurance. Since an increasing number of borrowers
are turning to piggyback loans in order to avoid PMI, the mortgage
insurance industry came up with this solution claiming that it
lowers monthly mortgage payments to the same or lower level as a
piggyback loan. With this option homebuyers pay a single premium on
their insurance and it is amortized over the term of loan.
One of the pitfalls of this solution is that few lenders offer this
option, since Fannie Mae and Freddie Mac do not work with this kind
of PMI structure.
Finding a Loan with No Private Mortgage Insurance
Loans with no PMI have one great disadvantage - they typically have
higher interest rates. Instead of paying regular PMI, the latter is
included in the higher rate of the mortgage.
Which of the above solutions will be best for you depends entirely
on your particular case. Sometimes paying the private mortgage
insurance might turn out more beneficial than choosing to avoid it
with a second mortgage. Therefore you should consider your decision
carefully and make all the necessary calculations in order to make
the right choice.
We're here to help.
We can prepare a comparison that shows a standard loan with monthly
PMI and a loan with Lender Paid Mortgage Insurance. There's no
social security number or credit check needed for a quote.
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