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          Learn more about the NJ mortgage process with our educational resources for homeowners.

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        • What is a Mortgage?A mortgage is simply a lien that is put on a property by a bank or lender of money to assist a consumer to obtain funding in order to purchase that property.
        • Mortgage Pre Approval vs. Pre QualificationAs a technical matter is there are actually 3 levels of “Pre-Approval” available as a lead-up to your mortgage.
        • What Factors Go Into Qualifying for a Mortgage?There are four main categories that a bank will review when they qualify you for mortgage financing, otherwise known as the four pillars of qualifying: Income, Assets, Credit, and Debt.
        • What is PMI Insurance?Private Mortgage Insurance (PMI) is quite simply an insurance policy that protects the mortgage lender in case of default on the mortgage.
        • New Jersey Mortgage Application ChecklistBeing fully prepared leading up to your application can prevent a lot of troubles and tribulations, which can be detrimental and emotionally taxing especially after you’ve gone to contract on your new home.
        • What Is The Minimum Down Payment For a House in NJ?Depending on your circumstances you may be looking to get into a property for the least amount of cash possible.
        • What Are The Three Different Types of Mortgage Lenders?There are 3 different types of lending companies that originate mortgage loans. Banks, Brokers, and Mortgage Bankers.
        • What Determines Mortgage Rates?A variety of factors lend their hand in the determination of where a particular lender will be on rates.
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How to Avoid PMI Insurance

How to Avoid PMI Insurance

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.

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.

Home Equity Loans and Lines

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
Seller Concessions

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.

Have more questions relating to PMI Insurance and how to avoid it?

Get customized answers for your situation here:

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Resources

  • What is a Mortgage?
  • New Jersey Mortgage Application Checklist
  • Mortgage Pre Approval vs. Pre Qualification
  • What Is The Minimum Down Payment For a House in NJ?
  • What Factors Go Into Qualifying for a Mortgage?
  • What Are The Three Different Types of Mortgage Lenders?
  • What is PMI Insurance?
  • What Determines Mortgage Rates?

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