Regardless of the topic, you’ll see one piece of advice repeatedly in this blog: Put down as much as you can on your new home. It means you’ll need to borrow less, and that could make qualifying easier if you’ve got previous credit hiccups. Almost as important, a 20% down payment is the standard where lenders will not require a mortgage insurance policy to cover the loan.
Mortgage insurance is a policy that protects lenders if you should default on your loan. Your ability to put more than 20% down on a home gives them confidence that you’ll be able to maintain payments for the life of the mortgage, and therefore they won’t require insurance.
That said, 20% is a lot of cash up front, and some people just won’t be comfortable putting it up. But you still don’t want to pay for mortgage insurance. Fortunately, you have options. Here are a number of ways that you can get out of mortgage insurance without putting 20% down.
1. Are You an Active Member or Veteran of the U.S. Armed Forces?
This is the most straightforward way to dodge mortgage insurance, but it obviously has pretty strict guidelines for qualification. The Department of Veterans Affairs offers VA loans to both active and retired members of the military.
The most notable feature of these loans is your ability to get into a new home without any down payment whatsoever. Regardless of how much you decide to put down, you’ll never be required to pay for mortgage insurance.
2. Take Out TWO Mortgages
This sounds counterintuitive…more mortgages means more to pay off, right? Nope!
Let’s say you want to put 10% down on a home, but you don’t want to pay mortgage insurance. Your lender can give you one mortgage that covers 80% of the purchase—leaving the other “20%” to you. However, the other 10% will be covered by the second loan. You’ll ultimately be paying the same amount as one mortgage that’s worth 90% of the home’s cost. Only without that pesky mortgage insurance!
3. Pay a Single Premium
This option still involves paying some form of insurance, but with one lump sum at closing, and not a monthly charge.
This could be a better option for you depending on how long you plan to be in the home. Speak with your lender to figure out what your monthly mortgage insurance payments will look like, and then consider how long you plan on being in the home. Multiply the number of months by the monthly rate. If this total is more than the upfront premium, it may benefit you to pay the lump sum (if you can afford it).
4. Have the Lender Pay for Their Own Dang Mortgage Insurance
This isn’t quite as awesome as it sounds, but it can still save you a lot of money. Lenders will pay for the mortgage insurance on the loan if you agree to pay a slightly higher interest rate on your mortgage. Figure out how much you’ll be paying with that rate, and multiply it by the number of months you plan on living at the home. Then compare it to the payments you would have with a lower interest rate and the monthly mortgage insurance payments, multiplied by the number of months at the home.
While paying an upfront premium will benefit those staying at a property for a longer period, this option will benefit those who plan on being in a home for a shorter period of time.