There are a number of ways that you may be able to avoid that unattractive, potentially non-deductible, extra payment of PMI insurance each month if you don’t think that you can muster the 20% to put down on your dream house. Here are some tips for how to avoid PMI insurance in NJ.
How to Avoid PMI Insurance
80-10-10 Mortgage (Split Mortgage) may not be your best option
One of the most popular ways historically to avoid PMI is to take out a home equity loan or line of credit on your house and close on this simultaneous with your first mortgage. This would mean that your first mortgage would equate to 80% of your purchase price and the equity loan or line would make up the difference, therefore avoiding the PMI requirement. While equity loans or lines may have a variable rate or carry a higher interest rate than your typical first mortgage, the higher interest has historically been only applicable on the equity loan balance and not the first mortgage. Unfortunately, that paradigm has shifted in the past few years with additional pricing caveats from investors who feel the risk of default on their first mortgage is higher with a 2nd mortgage in place. As a result, most lenders today will charge a higher rate on the first mortgage in order to compensate for the added risk. As a result, this type of split mortgage has significantly decreased in popularity recently.
Lender paid PMI
A popular alternative to the 80-10-10 to avoid PMI is what is commonly known as a “Lender Paid” or “Zero PMI” loan. In this case, the lender will offer a 1st mortgage with no PMI at a slightly higher interest rate (Usually 1/4 – 1/2% higher than the market). This offers the customer who is putting down less than 20% the opportunity to pay more on the rate while avoiding the payment of PMI.
Advantage to Lender Paid MI
Eliminates mortgage insurance altogether for those that feel they may not be in the home or mortgage for an extended period of time. If you feel rates could go down in the future for you to refinance or you will be moving out of the home, this option has merit.
Disadvantage to Lender Paid MI
A higher interest rate through the life of the loan means that if you will be on the mortgage for a significant period of time it may end up costing you more money in the long run.
Seller Concessions to pay for MI
Another common way to avoid mortgage insurance is to use a seller concession to pay for the cost of single premium mortgage insurance on an up-front basis. This allows you to keep the lower first mortgage rate and not have to contend with a monthly PMI payment. See here for more information about how seller concessions work.
Advantage to Seller Concession to pay for MI
Allows the buyer to keep their lower first mortgage rate and avoid PMI payments with less than 20% down
Disadvantage to Seller Concession to pay for MI
- Need seller’s agreement for concession.
- Property needs to appraise accordingly to accommodate concession
Keep In Mind
Bear in mind, if you choose to stay with the first mortgage and take the PMI, it can be finally eliminated once a 20% equity position is reached in your property. This can be done simply by paying your mortgage down to 80% of the original appraised value or purchase price (whichever is less). Once this is completed, you can request the lender remove the mortgage insurance.
In the case of appreciating property values, most lenders will allow you to simply obtain another appraisal to show that you truly have a 20% equity position. Once this is evidenced, they will immediately remove the PMI. Therefore your only out-of-pocket costs are that of the appraisal.