2870: How Can I Avoid Paying PMI (Private Mortgage Insurance)? by Laurie Sepulveda of Women Who Money

[00:00:00] [SPEAKER_00]: This is Optimal Finance Daily. How can I avoid paying PMI private mortgage insurance

[00:00:07] [SPEAKER_00]: by Laurie Sepulveda of WomenWhoMoney.com. And I'm your host and personal finance enthusiast,

[00:00:14] [SPEAKER_00]: Diana Merriam. Thanks so much for joining once again. I'm here narrating for you every single

[00:00:21] [SPEAKER_00]: day from some of the best articles on the web when it comes to money and finance.

[00:00:26] [SPEAKER_00]: So without further ado, let's get right to today's post and continue optimizing your life.

[00:00:36] [SPEAKER_00]: How can I avoid paying PMI private mortgage insurance by Laurie Sepulveda of WomenWhoMoney.com

[00:00:46] [SPEAKER_00]: You've been saving for months or years, but you're still far short of the amount you need

[00:00:52] [SPEAKER_00]: for the traditionally advised 20% down payment on a new house to avoid paying private mortgage

[00:00:59] [SPEAKER_00]: insurance. When saving up for a new home, especially your first, it can feel like forever

[00:01:05] [SPEAKER_00]: before you're able to save the tens of thousands of dollars you'll need. For most homebuyers,

[00:01:12] [SPEAKER_00]: that amount will take a while to save. Are there other options besides putting 20% down?

[00:01:19] [SPEAKER_00]: Many lenders will allow a smaller down payment of 10% or even 5%, but they require homebuyers

[00:01:27] [SPEAKER_00]: to take out private mortgage insurance or PMI. PMI is insurance the homeowner pays in exchange

[00:01:34] [SPEAKER_00]: for a smaller down payment. This insurance protects the lender, that is the bank providing you with a

[00:01:41] [SPEAKER_00]: loan in case you stop making mortgage payments. According to Investopedia, you typically pay

[00:01:47] [SPEAKER_00]: it between 0.5% to 1% of your loan balance per year in PMI on a conventional loan. If you buy

[00:01:56] [SPEAKER_00]: a $265,000 home with 10% down, your loan balance would be $238,500. This means you could expect to

[00:02:08] [SPEAKER_00]: pay up to $198.75 per month or $2,385 per year in PMI. This insurance premium is added to your

[00:02:20] [SPEAKER_00]: monthly mortgage payment. Once you've made enough payments to achieve at least 20% equity in your

[00:02:26] [SPEAKER_00]: home, that is, you owe less than 80% of the home's value according to your latest appraisal, you

[00:02:32] [SPEAKER_00]: stop paying PMI. In our example, if we assume a 30-year mortgage at 4% interest, it could take

[00:02:40] [SPEAKER_00]: more than six years for the principal of the loan to be paid down that far. This could mean over

[00:02:46] [SPEAKER_00]: $14,000 just in PMI payments. Is there any way to save on or avoid paying PMI? There are some

[00:02:56] [SPEAKER_00]: mortgages allowing you to pay the cost of PMI upfront with what is known as single premium PMI.

[00:03:03] [SPEAKER_00]: This will require a more substantial initial payment, an amount anywhere from 1% to 2% of

[00:03:09] [SPEAKER_00]: the loan cost. In most cases, this amount will be much less than an additional 10% down payment.

[00:03:16] [SPEAKER_00]: You'll also end up paying less PMI over the life of the loan. Negatives of having PMI.

[00:03:24] [SPEAKER_00]: It might seem tempting to trade the cost of $200 per month or an upfront payment of several

[00:03:30] [SPEAKER_00]: thousand dollars for getting into a home earlier. However, there are some downsides to paying PMI.

[00:03:38] [SPEAKER_00]: Apart from the fact that you'll have an additional monthly cost you'll never recoup,

[00:03:42] [SPEAKER_00]: buying a house with less than 20% down means you'll have a higher mortgage payment and you'll

[00:03:48] [SPEAKER_00]: pay more in total interest, all because your loan amount is higher. You also run the risk of

[00:03:54] [SPEAKER_00]: being in a negative equity situation if you have to sell your house in the next few years.

[00:04:00] [SPEAKER_00]: Putting down 20% insulates you from fluctuations in the value of your home from year to year.

[00:04:06] [SPEAKER_00]: It also helps ensure you're indeed in a financial position to buy a house.

[00:04:11] [SPEAKER_00]: Many new homebuyers get deeper into debt because they fail to budget for necessary home maintenance.

[00:04:17] [SPEAKER_00]: This includes smaller items like tools, lawnmowers or ladders and major home expenses

[00:04:24] [SPEAKER_00]: like painting the home, replacing appliances or putting on a new roof.

[00:04:29] [SPEAKER_00]: Does it ever make sense to put less than 20% down on a home purchase?

[00:04:35] [SPEAKER_00]: There are plenty of reasons why people choose to buy a house with a smaller than 20% down payment.

[00:04:41] [SPEAKER_00]: Maybe you found a terrific deal in your dream neighborhood.

[00:04:45] [SPEAKER_00]: If you wait to save a more significant down payment, you'd lose the opportunity of a lifetime.

[00:04:51] [SPEAKER_00]: If you're risk adverse, you may wish to have more cash available for an emergency fund.

[00:04:56] [SPEAKER_00]: You could also plan to accelerate the principal mortgage payments on your home in a few months

[00:05:01] [SPEAKER_00]: or years, wiping out your PMI fast. Or maybe you need a house now because your family is growing

[00:05:08] [SPEAKER_00]: or you're relocating. Just be aware that over the life of your loan, you'll pay not only PMI,

[00:05:15] [SPEAKER_00]: but higher amounts of interest because you took out a bigger mortgage.

[00:05:20] [SPEAKER_00]: That means your total cost can be a lot higher than just the cost of PMI.

[00:05:25] [SPEAKER_00]: What if I don't have a 20% down payment and I want to avoid paying PMI?

[00:05:30] [SPEAKER_00]: There are several things you can do if you want to avoid paying PMI.

[00:05:34] [SPEAKER_00]: One option is to take out a second mortgage. Some lenders will allow you to do this by setting up

[00:05:41] [SPEAKER_00]: a home equity line or taking out a second loan. Be warned though, you'll generally pay a much

[00:05:47] [SPEAKER_00]: higher interest rate for the second mortgage than you will for the first. Another option

[00:05:53] [SPEAKER_00]: is to rethink your plan. If you have less than 20% to put down, you might consider revising your

[00:05:59] [SPEAKER_00]: budget and buying less house or a condo or townhome instead of a single family home.

[00:06:05] [SPEAKER_00]: While this is generally a less fun option, you could consider buying a fixer upper and

[00:06:11] [SPEAKER_00]: renovating it slowly as you save up for it. You could also look into buying a duplex or a

[00:06:17] [SPEAKER_00]: house with a mother-in-law suite instead of a single family home. Then you could rent out the

[00:06:22] [SPEAKER_00]: extra side of the house or suite within your home. This way you could earn extra money to help you

[00:06:29] [SPEAKER_00]: pay down your mortgage and get rid of your PMI payments much faster than going it alone.

[00:06:35] [SPEAKER_00]: What makes the most sense for you? The most important thing to remember is that personal

[00:06:41] [SPEAKER_00]: finance is personal. Even if experts recommend putting 20% down for a home to avoid paying PMI,

[00:06:48] [SPEAKER_00]: there may be a different option better for you. Just be honest with yourself about what you can

[00:06:53] [SPEAKER_00]: genuinely afford before you sign on for a mortgage that will be with you for many years to come.

[00:07:03] [SPEAKER_00]: You just listened to the post titled, How Can I Avoid Paying PMI, Private Mortgage Insurance?

[00:07:10] [SPEAKER_00]: by Lori Sepulveda of womenwhomoney.com and I'll be right back with my commentary.

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[00:08:18] [SPEAKER_00]: When I bought my house, it was important for me to avoid PMI. So I got a little creative and

[00:08:24] [SPEAKER_00]: actually used one of the strategies highlighted in this article. I had the 20% down payment,

[00:08:30] [SPEAKER_00]: but it was pretty much all the cash I had on hand and I didn't want to part with it all

[00:08:35] [SPEAKER_00]: for obvious reasons. So I found a lender that let me pay half of my down payment with a HELOC,

[00:08:42] [SPEAKER_00]: also known as a second mortgage or home equity line of credit. I ended up paying that off in

[00:08:48] [SPEAKER_00]: six months and I only paid around $200 in interest. It was totally worth it for the

[00:08:53] [SPEAKER_00]: peace of mind. However, I didn't realize that most HELOCs have variable interest rates.

[00:09:00] [SPEAKER_00]: So while the loan started with the same interest rate as my mortgage, I was shocked to see that in

[00:09:06] [SPEAKER_00]: the six month period back in 2018, my interest rate went up three times. Three freaking times.

[00:09:14] [SPEAKER_00]: And that resulted in the interest rate being almost a whole percentage point higher than I

[00:09:19] [SPEAKER_00]: thought I was signing up for. Boy, am I glad I paid that off quickly. And I would only recommend

[00:09:25] [SPEAKER_00]: this strategy for people that have the same ability to pay it off very quickly. But that'll

[00:09:31] [SPEAKER_00]: do it for this episode. Have a great rest of your day and I'll be back with you again tomorrow,

[00:09:37] [SPEAKER_00]: where your optimal life awaits.