Private mortgage insurance, or PMI, might look like an extra, unnecessary charge on your monthly bill. You're basically paying for insurance for the mortgage company so it has protection in case you default on your loan. Unfortunately, PMI is the price you must pay to get a loan if you don't have a large enough down payment.
Most mortgage companies require you to pay PMI if your down payment is less than 20 percent of the loan value. If you want to get the loan from that company, you have no choice but to pay for its PMI. You might get the option to pay the mortgage insurance as part of your monthly payment or in a lump sum at closing, but there's usually no option to avoid PMI without 20 percent down.
Paying It Down
If you don't have 20 percent to put down on your home, pay attention to your mortgage statement each month and watch the principal amount decrease. When it decreases enough so that you've paid an amount equivalent to 20 percent -- for example, if you owe $80,000 on a $100,000 loan -- call your lender to discuss removing the PMI. Getting to that point typically takes several years, but paying a small extra amount toward the principal each month can speed the process.
If you don't have a down payment but want to avoid paying PMI, shop around for a second mortgage that gives you the 20 percent you need. This allows you to finance 80 percent through the first lender and avoid PMI while financing the down payment with a second company rather than coming up with it out of pocket. The downside of this plan is that the second mortgage usually has a much higher interest rate than the first mortgage, so it costs you more over the life of the loan. Also, you end up with two mortgage payments each month, which could cost you more than adding PMI to your payment with the first lender.
FHA and VA Loans
The Federal Housing Administration and Department of Veteran's Affairs offer lenders government insurance that helps qualified applicants, such as first-time buyers and military veterans. Although these loans don't require traditional PMI, you must pay a mortgage insurance premium at closing. The FHA requires a monthly insurance payment as well. But once you've paid the loan down to 78 percent of the original loan amount, you can petition to have the mortgage insurance removed. If you have less than 15 years left on the loan, you can petition when you've reached 88 percent instead.
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