Financial black-belts look for ways to optimize their investments. So who wants to “give away” 0.5% to 2.5% of their mortgage loan balance every year, right? That’s exactly what happens when you have Private Mortgage Insurance, better known as PMI, on a conventional mortgage. Whether to avoid PMI or not actually requires a case-by-case analysis.
To make homeownership accessible through low down payments (less than 20%), lenders require mortgage insurance to mitigate risk. The higher the Loan-to-Value (LTV) is, the higher the PMI rate will be. So, putting 3% down on a $200,000 home means an LTV of 97%, which could mean an increase of anywhere from $92 to $372/mo., depending on your credit score.
PMI Natural Death
By law, PMI vanishes on its own once your LTV reaches 78% or at 80% under review. Why wait when there are paths to retire PMI early or avoid it all together?
The first analysis is the value of the down payment against the cost of PMI.
- If you plan to stay in the home more than 3 years, should you consider an up-front PMI payoff?
- If you already own a home, should you use a HELOC to put 20% down on the next home?
- If you have investments (eg. 401k) should you borrow against those assets, with a plan to later repay via a HELOC?
Each case is worth scrutiny and a cost/benefit analysis.
The Fix & Flip Move:
In this scenario, you don’t flip your house, you flip your mortgage – after you’ve improved the value of your home. Opt for a low down payment, use reserves to improve your home, and embrace the PMI like a wrestler about to pin their opponent. In a market where values are on the rise, you’d then refinance your home or seek re-appraisal based on the improved value at 80% LTV. The upside is an improved home and the likely eradication of PMI. The risk would be market and interest rate volatility, but then it’s just a waiting game.
True PMI Avoidance:
For eligible veterans, a 0% down VA loan is usually the best way to avoid PMI. For everyone else, a strategy unique to your circumstances is in order.