No one wants to pay private mortgage insurance (PMI) on a mortgage. It isnt cheap, and it adds to the monthly cost of the mortgage. Understanding the reasons behind your potential stickiness with PMI is the first step towards determining whether you can avoid it altogether.
One of the risk measures that lenders use in underwriting a mortgage is the mortgages loan-to-value (LTV) ratio. This is a simple calculation made by dividing the loan amount by the value of the home. The higher the LTV ratio, the higher the risk profile of the mortgage. Most mortgages with an LTV ratio greater than 80% require that the borrower pay PMI. This is due to the fact that a borrower who owns less than 2020% of the property’s value is more likely to default on a loan.
Buying a home is a huge step, and one of the biggest hurdles is the down payment If you can’t afford 20% down, you’ll likely be required to pay private mortgage insurance (PMI) But don’t despair! There are ways to avoid PMI even with a 10% down payment. Let’s explore some options.
Piggyback Loans: Your Ticket to 0% Down
An 80-10-10 loan, sometimes referred to as a piggyback loan, is a cunning way to avoid PMI. This loan structure combines two mortgages:
- 80% First Mortgage: This covers 80% of the home’s purchase price.
- 10% Second Mortgage: This acts as a down payment, covering another 10% of the purchase price.
- 10% Down Payment: You’ll need to come up with 10% of the purchase price in cash.
Essentially, you’re putting down 20% in total, but with two separate loans This allows you to avoid PMI while still having a manageable down payment.
Benefits of Piggyback Loans:
- Avoid PMI: This is the biggest advantage, saving you hundreds of dollars per month.
- Lower Interest Rates: Piggyback loans often have lower interest rates than traditional second mortgages.
- Flexible Options: You can choose different terms for each loan to fit your budget.
Drawbacks of Piggyback Loans:
- Higher Closing Costs: You’ll have to pay closing costs on both loans, which can add up.
- Two Monthly Payments: You’ll have two separate mortgage payments to manage.
- Credit Score Requirements: You’ll need good credit to qualify for a piggyback loan.
Other Ways to Avoid PMI:
- Lender-Paid Mortgage Insurance: Some lenders offer to pay your PMI, but this usually means a higher interest rate.
- Home Loan Programs: Certain government and non-profit programs offer low down payment options with no PMI.
- Gift Funds: Using gift money for your down payment can help you reach the 20% threshold and avoid PMI.
The Bottom Line:
Avoiding PMI with a 10% down payment is possible with the right strategies. Piggyback loans are a popular option, but explore other programs and consider your financial situation before making a decision. Remember, the best approach depends on your individual circumstances and goals.
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) is a type of insurance that you might have to obtain if your down payment on a house is less than 2020%. The PMI guards against loan default for the mortgage lender; however, as you build equity in your house over time, you might be able to get rid of the PMI.
Second Mortgage Loan
An alternative to paying PMI is to use a second mortgage or whats known as a piggyback loan. This is how it works: You obtain a first mortgage with a payment equal to 80% of the home’s value, avoiding PMI. You then obtain a second mortgage with a payment equal to the home’s sale price, less the amount of the down payment and the first mortgage.
If the house you are purchasing costs $300,000, using the figures from the above example, you would take out a first mortgage for $240,000, put down $30,000, and then obtain a second mortgage for $30,000. This eliminates the need to pay PMI because the LTV ratio of the first mortgage is 80%. But in addition, you now have a second mortgage, which will undoubtedly have a higher interest rate than the first one. A mortgage calculator can show you the impact of different rates on your monthly payment.
Although many types of second mortgages are available, the higher interest rate is par for the course. Nonetheless, the first and second mortgage combined payments typically equal less than the first mortgage plus PMI payments.
Can You Avoid PMI with a 10% Down Payment?
FAQ
What is the ideal downpayment to avoid paying a PMI?
Could PMI be required by your lender when you only put 10% down on a home mortgage?
How do I get my PMI waived?
How much money should I put down to avoid PMI?
If your new home costs $180,000, for example, you would need to put down at least $36,000 to avoid paying PMI. While that’s the simplest way to avoid PMI, a down payment that size may not be feasible.In
How to avoid PMI?
It is required for financing more than 80% of the purchase price of a home with a down payment of less than 20% .Here are some ways to avoid PMI: 1. **Make a down payment of at least 20%**: This
Can I avoid PMI without a 20% down payment?
There are a couple of ways that you can avoid PMI without making a 20% down payment. With an 80-10-10 loan, also called a piggyback loan, you make a 10% down payment and have two mortgages that cover the other 90%. Though uncommon, some lenders will offer lender-paid mortgage insurance.
How do I avoid paying PMI on a new home?
One way to avoid paying PMI is to make a down payment that is equal to at least one-fifth of the purchase price of the home; in mortgage-speak, the mortgage’s loan-to-value (LTV) ratio is 80%. If your new home costs $180,000, for example, you would need to put down at least $36,000 to avoid paying PMI.