Buying a home is a significant investment you should take seriously. If you don’t have enough cash to purchase the property, applying for financing can be one of your options. However, if you make a down payment of less than 20% of the total home price, on top of being qualified for financing, your lender will oblige you to take private mortgage insurance (PMI) to proceed with the loan.
Essentially, PMI refers to an insurance policy borrowers have to carry due to the extra financial risks, such as default and foreclosure, that lenders need to take when they approve your loan. Such is the case even if you can’t make a significant down payment. However, having a PMI policy may take a financial toll on your bank account even if it allows you to get financing without the 20% down payment. If you have PMI, it may add up to your home-related expenses, including a homeowners’ insurance policy once you buy the property.
So, if you want to save money in the long run, the following are four alternative options to PMI you should consider:
- Make A 20% Down Payment
If you’re a first-time homebuyer, the best alternative to paying PMI is making at least a 20% down payment. Realistically speaking, dealing with PMI doesn’t have to be a problem if you have the funds to pay for the 20% down payment.
If you don’t have enough funds for the payment, you should look for some alternative resources. For instance, you can check out some assistance programs to get the money you need for the down payment. You can also ask for support from your family and friends to help you financially.
- Apply For Low Down Payment Loans
Another alternative to PMI you may want to keep in mind is getting a low down payment loan. Several government-backed loan options require you to make a low down payment and avoid paying PMI when buying a property.
An example of this loan is an FHA (Federal Housing Administration) loan. When you take out this mortgage, you’re not required to pay the 20% down payment before buying a house. Another low down payment option you may consider is the VA (Department of Veterans Affairs) loan. Like the FHA loan, it doesn’t require mortgage insurance payment, plus it allows you to make zero down payment.
- Get A Piggyback Mortgage
This is another alternative to PMI. Also known as the 80/10/10 mortgage, it is a type of home loan that involves obtaining two mortgages simultaneously. Under this mortgage type, you take out a loan to finance 80% of your property’s total price and the other mortgage for the 10%. The remaining 10% will come from your funds for the down payment. Due to this setup, you don’t need to pay for the PMI when buying a home.
If you take out a piggyback mortgage, it’s essential to familiarize yourself with its different types. These can include a home equity loan, a home equity line of credit (HELOC), and simply taking out a second mortgage.
Typically, the type of piggyback mortgage you choose may depend on your personal needs. Whatever you pick, though, taking out this type of mortgage comes with some benefits. It helps you get rid of expensive insurance payments without the need to look for a cheaper home. It also allows you to make a lower down payment, at probably 5% of the total purchase price.
- Take Out A Single-Payment Mortgage Insurance
If you want to save yourself from paying PMI within a certain amount of time, you may consider getting single-payment mortgage insurance as an alternative option. Although it requires you to pay an additional fee for your home purchase, it offers you a favorable cost-benefit.
Generally, single-payment mortgage insurance is a type of insurance that lets you pay a part of your mortgage insurance premiums at a discount price during closing. Even if you need to pay an extra fee upfront, it would still be beneficial because you don’t need to finance the insurance costs into your house payment for the long term. You can lower your monthly payment and avail a longer repayment term for a lower-cost loan by getting single-payment mortgage insurance.
In most cases, paying PMI for the whole duration of your loan can be financially draining and stressful. It doesn’t have any benefit to you as a homebuyer as well. Hence, if you want to save yourself from paying PMI, it’s best to consider alternatives. The options mentioned here may help you find the right solution to get rid of PMI and acquire your dream house without financial constraints.