Mortgage and Home Buying Advice: Avoid PMI

How to Avoid PMI (Private Mortgage Insurance)

As I’m in the process of purchasing a new home, I figure I’d share some of my findings on ways to save some money and ensure that you’re getting a good deal.

First on the list is how to avoid PMI. For those that don’t know what PMI is, it’s mortgage insurance. Not homeowners insurance (you’ll have to get that too), it’s insurance that a bank makes you buy just in case you default on the loan. You are only required to have PMI if you borrow more than 80% of the appraised value of the home. As soon as you’ve built 20% equity on the house, you don’t have to pay PMI anymore, so…

1. Build that equity. How? Well, make extra payments if you can. Not only will it help build equity faster, it will shorten the life of the loan dramatically.

2. Get a good deal on the house. Or get a good appraisal on the house. Either way, if you buy a house for $350,000 and it’s appraised at $400,000, you can get away with putting 10% ($35k) down and not paying PMI. As always, you might wish to question why it is you’re getting the house for such a discount. As they say, if something sounds too good to be true, it probably is.

3. Borrow from more than one place. You can borrow 80% from your primary bank, put 10% down and then you can borrow the rest from another bank. This way, you’ll avoid paying PMI because you’re under the 80% threshold required by your first bank. BUT, you’ll be paying more in interest because the second loan won’t necessarily be at a low rate. You’ll also have more than one mortgage payment to make.

4. Cross your fingers. And hope that the value of the house will go up in 6 months to a year. Then get the house re-appraised (costs around $350 to get an appraisal). If you have greater than 20% equity in the house, you can cancel your PMI. The value of the house can also go up by making improvements to the house.