The last thing you need when purchasing your home is an additional fee tacked on to your mortgage for Private Mortgage Insurance, or PMI. Let’s go over how to avoid paying PMI when buying a house in New Jersey to do everything to keep your monthly mortgage payments as low as possible:
What Is Private Mortgage Insurance?
It’s common for buyers to become caught up in the excitement of closing on their new home and sign on the dotted line before truly understanding the important details of their mortgage.
PMI is an insurance policy taken out by the lender with premiums paid by the homeowner. The monthly payment for the premiums is simply added to the owner’s monthly mortgage payments – so it can be easily overlooked by an inexperienced owner.
The sole intent of this insurance policy is to cover any losses the lender may incur if the new homeowner defaults on their mortgage. PMI does not exist to assist the homeowner and is entirely in place as a financial safety measure on behalf of the mortgage lender.
Now, let’s look at some ways to stop yourself from ever having to make a single PMI payment.
The All-Important Down Payment
By far the simplest way to completely avoid those additional PMI payments is to put twenty percent of the total purchase price down at closing.
This means that, if you are buying a house at $200,000, you would be putting down $40,000 at the time of closing. Putting down the 20% on your new home, signals that you have the necessary funds and also immediately increases your equity in the property.
With both of these qualifications satisfied, the lender can relax, and you’re automatically less of a potential liability to the lender.
Piggyback Mortgage
A much less conventional method to bypass PMI is taking out a second loan that covers the remaining cost of the missing portion of that 20% down payment.
This is normally done through a home equity line of credit (HELOC) or conventional home equity loan. Keep in mind that the qualifying funds with both of these loans are dependent on the equity you have built in the home already, which is going to be rather limited as you’re already under 20% equity.
Covering the remaining down payment frees you from PMI payments, but you then need to plan for repaying your new loan balance through the home equity loan. As is always the case: run the numbers multiple times yourself to have a clear picture of what you can expect.
Lender-Paid Mortgage Insurance
Although less desirable than the previous two options, electing to go the LPMI route does eliminate paying PMI.
The difference here is that the lender covers the PMI premiums and, in exchange, your mortgage rates are increased. This means you sidestep the PMI in favor of what are more than likely long-term mortgage payment hikes until you either pay off the loan or refinance for a lowered interest rate after building substantial equity in the property.
While an option, it’s an immediate potential saving for almost certainly more costs down the road.
Loan Programs
Finally, what is likely the most useful way to avoid paying PMI is to see if you qualify for any local, state, or federal loan programs that eliminate PMI entirely.
A couple of examples of these would be VA loans for military veterans and USDA loans that are issued to spur rural housing acquisition and construction. To see if you qualify for any of these programs, contact your local branch of the Federal Housing Administration and let them know your house buying circumstances.
Guidance to Avoid Paying PMI When Buying a New Jersey House
If you’re looking for ways to avoid paying PMI when buying a house in New Jersey, contact us today at 855-966-DEAL!