Young couples get excited over the prospect of buying a home. They save their pennies each month to have money to put toward buying their new home. Mortgage loans are a tangled web of interest rates, fees, points, closing costs and personal mortgage insurance.
Private mortgage insurance provides your lender 10 percent of the cost of the loan should you default on the mortgage. The lender rolls the cost of the PMI into your loan, increasing your monthly mortgage payment. You cannot negotiate the rate of your PMI, but there are other ways to lower or eliminate PMI from your monthly payment.
Ways to lower PMI include using a larger down payment, splitting your loan, improving your credit score, refinancing your home and making extra payments.
Put More Money Down
Increase your down payment on your house. All mortgage loans in which the loan exceeds 80 percent of the price of the home – in other words, loans on which your down payment is less than 20 percent – automatically get PMI. Provide a high enough down payment to knock your total loan under the 80 percent value, and you'll bypass dealing with PMI altogether.
Use the 80-10-10 Method
Split your loan using an 80-10-10 method to eliminate PMI: Pay 10 percent of the price of the loan as a down payment. Take out a mortgage loan for 80 percent of the price of the loan. Finally, take out an additional loan to pay for the rest of the 10 percent of the loan.
You'll pay a higher rate on the second loan than on the primary mortgage, but it may save you money by eliminating your PMI payments.
Improve Your Credit Score
Improve your credit rating. Wait to purchase a home until your credit score increases. PMI payments are set depending on the credit rating of the borrower at the time of the mortgage.
Refinance Your House
You'll get a new mortgage loan, terms and PMI rate if you refinance. You will also experience additional fees and closing costs. Make sure they don’t exceed what you would normally pay in PMI to make it worth your while. Or at least make sure that the savings you will see on PMI costs will help you recoup the cost of the refinancing fees within a reasonable amount of time.
Make Extra Payments
Cancel your PMI. Pay your house down to the point where you have 20 percent equity in it, and you should be allowed to cancel your PMI. In fact, if you get your loan-to-value ratio down to 78 percent, the federal Homeowner’s Protection Act will require your lender to drop your PMI insurance. You will probably need to request that this be done, but the lender can't refuse you at that point.