How To Avoid PMI

When buying your next house, strategic planning ahead of time is key to a very successful transaction. A successful transaction is one that places you at an advantage when all is said and done. 

Believe it or not, knowing your financial options related to strategies available to you places you way ahead of the game. This is the first in a series of blogs where I’m going to cover each strategy to help enlighten you and open up new possibilities you were likely unaware of before. 

Why am I so confident you are probably unaware of many of these options? Unfortunately, the majority of lenders will often not provide you with that information. 

The strategies I’m revealing to you will meet short and long-term goals for any buyer and/or seller. Understanding this information will help you to identify your financing options when you’re ready to move forward with the mortgage process. 

Identify Your Objectives

The first step in choosing a financial strategy is to first get a clear understanding of where you want to be with your family and finances. Answer these questions:

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  • What are your goals in the next six to twelve months? 
  • When do you want to move?
  • If you have a home to sell, how much time do you have to move based on selling your home?

Should you avoid PMI when purchasing a home?

Homebuyers are often convinced that the only way to lower their mortgage costs is to avoid paying Private Mortgage Insurance (PMI). Oftentimes, homebuyers are unaware of the facts around PMI and different strategies available to them. Yes, putting down 20% of the purchase price helps you avoid PMI, but there are other ways that will save you thousands of dollars. So, let’s understand what PMI is and how it works. 

PMI Mortgage Insurance

Private Mortgage Insurance and it’s not the enemy. It’s a tool and knowing how to use it properly will be a huge advantage to you. PMI is not always necessary and in some cases can be the wrong move. Oftentimes, the best strategy is to put down 3% or 5% instead of 20% and free up cash to pay down your credit cards, student and/or car loans. Eliminating these debts will considerably lighten your monthly load and free up more cash you can use elsewhere. 

Employing smart purchasing strategies can lower your total monthly bills for a new mortgage and place you at a considerably better financial position than before you started.  Using the right strategy you can come out with less debt and in a much better financial position than you are now.

FACT: PMI doesn’t stay with you forever. You can put less than 20% down and PMI still goes away:

  • 5% down payment PMI falls off in 84 months
  • 10% down payment PMI falls off in 60 months
  • 15% down payment PMI falls off in 36 months

Example: 5% down with PMI of $100/month could total $8,400 before it falls off in 84 months. The best strategy is to buy out of PMI at an approximate 50% discount. You get the discount so long as you buy out of PMI at closing, not after.

Buying out of PMI at closing means you’ll only need $4,200 to buy out of PMI. Bring this to the closing table along with your 5% downpayment and consider your PMI eliminated. Let’s see how this strategy works with a purchase price of $200,000 at 4% Interest over a 30-year term.

20% down ($40,000)

  • Loan amount is $160,000 
  • Principal and interest are $763 monthly.
  • Cash to close is $40,000

5% down ($10,000)

Loan amount $190,000. 

  • Principal & Interest $907
  • $100 PMI charge
  • Principal & Interest $244 monthly.
  • Cash to close $10,000.

Now, let’s incorporate the PMI buy out option: 

  • $4,200 to buy out – NO PMI
  • 5% down or $10,000
  • Total cash to close = $14,200

By putting down only 5% of your purchase price and buying out of the PMI upfront you are keeping $25,800 in your pocket when compared to the 20% downpayment options. Your total cash to close is $14,200 versus $40,000 you would have paid otherwise.

If your tight on cash, consider taking a temporary loan from your 401K to help supplement your funds. Also, consider asking for seller concessions to help cover all of your closing costs, further reducing your cash to close.

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Seller Concessions

Something that can considerably help you save money and lower your closing costs is to negotiate a seller’s concession as part of your purchase agreement. 

The maximum seller concessions you can ask for when putting less than 10% down is 3% of the purchase price.  For a $200,000 home the seller would cover up to $6,000 towards your closing costs which are typically enough for a $200,000 purchase.

Government Home Loans

The only exception to this are government home loans. Government home loans are loans that the government makes to people who are seeking to buy a home. These loans are often referred to as the Federal Housing Administration (FHA) loans and they are made by the Housing & Urban Development (HUD) department of the government. 

Government loans are credit score driven. The better your credit, the lower your interest rate and PMI. With FHA loans the government assesses and adds fees to your total loan amount over time. PMI remains. When a credit score is an issue, government loans are often your best solution.

Looking For A Lender Who Won’t Hide These Options From You?

Brace yourself. You may have to shop around until you find the right lender. Contrary to popular opinion, the small bank in your community could be the perfect fit in that they may offer you more flexibility than the “big box” bank lender will. My recommendation is to be armed with knowledge, knowing exactly what you want first, then shop locally.

For those in my area, southeast Livingston & Oakland County Michigan, I’m happy to lead you straight to a lender who is very highly regarded in the industry and a real straight shooter. If you’re purchasing in surround areas of Washtenaw they can also assist you or at the very least refer you to another lender in your area. Feel free to contact me.

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Your Two Cents

I hope this information opens up some possibilities to you. Remember, it’s the first in a series so be sure to bookmark this site and check back often. Feel free to leave your questions and comments below.

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4 Responses

  1. Nadine Leddy says:

    Although I am not from your country and our terms and conditions for buying and selling homes would vary, I found this to be a very thorough and transparent post. I was really impressed with how much knowledge you have on PMI and the detailed strategies you offered, to clearly show that one size does not fit all. The one thing that is the same in both countries is the importance of having an excellent lender to inform all options and offer an understanding of how varying percentage rates can affect short and long term monthly savings. Selling and buying a new house can be a very stressful process, financially. So, looking at the option of buying out of PMI at the closing stage, could be very beneficial.

  2. Lisa says:

    Hi Annette,

    Wow, what great information, thank you! The whole process of buying a house is a minefield of expense so I really appreciate the time you’ve taken to educate on how to avoid PMI.

    As an analytical person, I’m especially glad that you included worked examples of the various ways to reduce the cost of PMI. Once I’ve worked out what my options are using your examples, is there somewhere I can get advice on which option is the best for me to pursue?

    Thanks in advance!

    • Annette says:

      Hi Lisa, Yes. A good lender is one who is willing to show you all your options including how to improve your credit rating so that you get the best rates. Believe it or not some lenders pay for a third party service that will look up your current credit report and point out where you can improve that will have the biggest impact on your score. I went through this process myself with a lender. What I found most surprising was that that paying down all of your outstanding payments can actually do more harm to your score than good. The insight and information I learned from that experience has benefitted me in so many ways since. So, yes. Shop lenders. Start with your local bank as more often than not, small banks lenders will work twice as hard for your business than the big boys do.

  3. evans says:

    I really totally agree with you that a strategic planning is what very individual needs I life before embarking on any said life decision especially those that relates to his expenses…Being a creative individual entails that you most put into consideration your objectives on every decision you take…Having gone through and known the objective of your life helps you avoid a lot issues from PMI.

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