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(In the USA)

Looking around the Internet, I see many places saying that private mortgage insurance (PMI) is almost certainly going to be required for any mortgage with a less than 20% down payment.

I am asking, is it possible to avoid getting PMI if you have less than 20% down? And if so, what are the alternatives and/or lenders that provide such a mortgage?

(Note that my question is different from this one, in that I'm asking about avoid PMI before closing on a house, rather than getting out of PMI before reaching 20% in equity after already getting into a mortgage.)

NeutronStar
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3 Answers3

7

Yes. Outside of a VA loan, there are two common ways to do this:

  1. You take out a first mortgage for 80%, and a second mortgage for whatever is left after your down payment. Prior to 2008, it was common for the second mortgage to be 20% with literally no money down. After the housing bubble burst (which was possibly caused in part due to the existence of the no money down option), the second mortgage has fallen out of favor, but still exists in conjunction with some amount of down payment, perhaps in the 10% range.
  2. There is an option called LPMI (lender paid mortgage insurance). Basically the lender pays the PMI on your behalf in a lump sum, and charges you a higher interest rate as a result. This sometimes makes sense because the cost of the higher interest rate per month is typically less than the cost of PMI per month. The caveat though is that with PMI, once you get your equity over the 20% mark you can lose the PMI, but with LPMI the rate sticks with you for the life of the loan.

Some notes about LPMI:

  • In one scenario where I ran the numbers for PMI vs LPMI, we discovered that the buyer would have to keep his loan for 8 years in order for PMI to be the better option than LPMI. He ended up going with LPMI with the assumption that he would likely sell or refi within 8 years.
  • In another scenario the mortgage broker was able to drastically reduce the cost of LPMI. (I think the rate increase was only .125%) That made it a no-brainer compared to PMI.
  • In general, PMI is usually the better deal if you intend to keep your loan for a long time, especially because as soon as you accumulate the money, you can pay down the loan ASAP to lose the PMI. Note it probably will cost you $500 to order a new appraisal as required by most banks if removing PMI before the normal scheduled fall-off.
TTT
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Yes, if:

  1. you're a Veteran and get a VA loan, or
  2. you've got family with money who'll make a private mortgage.

Otherwise, I don't think so.

RonJohn
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Yes, that's possible. Owing to various customer-friendly loan options by different agencies, people can now buy a home with less than 20 percent down payment. Through a Conventional Loan or an FHA Loan, you can buy a home with only 3-5 percent of down percent. Moreover, the USDA Loan or VA Loan allows you to get a mortgage at 0 percent down payment.

Anil Kumar
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