When I purchased my first home 12 years ago, I had no idea what I was doing. I saw the house on a Tuesday, put an offer in on a Sunday, and the road to homeownership began 5 days after my 24th birthday. Because I wasn’t really planning on buying a house at that time, I didn’t have a sinking fund for a house down payment. I simply had my regular savings funded my money I earned in my first real job out of college. Oh, and did I mention that all of this happened in the middle of the recession?
For a little financial transparency on my homebuying process, I took out a 30 year FHA loan on a foreclosed home that needed many repairs and renovations. My loan was equal to the purchase price, plus a little extra for repairs, minus my less than 20% down payment.
Because I purchased a home with less than 20% of the home’s purchase price, I was required by my lender to pay private mortgage insurance (PMI) as a condition of my mortgage loan. According to article 5 Types of Mortgage PMI, “when a borrower makes a down payment of less than 20% of the property’s value, the mortgage’s loan-to-value (LTV) ratio is over 80% (the higher the LTV ratio, the higher the risk profile of the mortgage for the lender)”. PMI was create to protect lenders in case higher risk homeowners default on the loan. While it sucks to pay extra PMI on top of my monthly mortgage payment, this condition did allow me to become a homeowner even though I could afford the 20% at the time.
After 12 years of paying private mortgage insurance, I called my lender today to get it cancelled. I did not need a script that some people try to sell online. I simply called on a whim and asked to cancel my PMI. To be honest, I was not expecting it to be cancelled but rather I was expecting them to tell me I had to get to a certain balance to qualify. I personally believe what helped sway the decision was the fact the value in my home, like many other homes in the US right now. Since the equity value increased it lowered my mortgage’s loan-to-value (LTV) ration and I am now able to save a little more each month on the mortgage.
Other Ways to Avoid PMI
Save 20% Before You Buy a House. It is easy for people in the personal finance community to dish out this piece of advice to potential homebuyers but depending on the circumstances, saving 20% on a home price can be difficult. The Statista Research Department explains that “after plateauing between 2017 and 2019, house prices in the United States saw an increase in 2020 and 2021. The average sales price of a new home in 2020 was 389,400 U.S. dollars and in 2021, it reached 408,800 U.S. dollars”. To purchase a house for $408,800 with you 20% down payment, you would need have $81,760 in liquid funds available.
Are You A Veteran or Active Military? One of the many benefits of a VA loan is that you are not required to pay PMI. This is beneficial because you can buy a home now without having to first save for a down payment.
Getting a Small Loan to Cover the Down Payment A homebuyer may be able to avoid PMI by piggybacking a smaller loan to cover the down payment on top of the primary mortgage. I personally wouldn’t recommend this option, but again, others in the personal finance community do.