When purchasing a home in Washington, many buyers are concerned about the additional costs associated with private mortgage insurance (PMI). PMI is often required when your down payment is less than 20% of the home’s purchase price. Fortunately, there are several strategies to avoid this added expense. Below are some effective tips on how to avoid paying PMI on your mortgage in Washington.
1. Make a Larger Down Payment
One of the most straightforward ways to avoid PMI is by making a down payment of at least 20% of your home’s purchase price. While this may not be feasible for everyone, saving for a larger down payment can save you money in the long run. Consider setting a savings plan that allows you to accumulate the necessary funds to reach that 20% threshold.
2. Consider a Piggyback Loan
A piggyback loan, also known as a second mortgage, involves taking out two loans simultaneously. Typically, you would borrow 80% of the home’s value through a primary mortgage, while the second loan covers the additional 10-15%. This arrangement allows you to avoid PMI completely, as you are technically financing 80% or less of the home’s value with the primary mortgage.
3. Look for Lender-Paid Mortgage Insurance (LPMI)
Some lenders offer a program known as lender-paid mortgage insurance (LPMI). With this option, the lender pays the PMI upfront, but you will likely face a higher interest rate on your mortgage. While LPMI can help avoid immediate PMI costs, it’s essential to run the numbers to see if this option saves you money in the long run.
4. Choose a Federal Housing Administration (FHA) Loan Wisely
If you opt for an FHA loan, be aware that it comes with its type of mortgage insurance. While you cannot avoid PMI with FHA loans, you can look for options within the program that might lessen the insurance cost. Understanding the differences between loan types can help you make a more informed decision.
5. Increase Your Credit Score
Your credit score plays a significant role in determining your mortgage terms, including PMI. A higher credit score may qualify you for better loan options or lower interest rates, which can reduce or eliminate the need for PMI. Work on improving your credit score by paying down debts and making timely payments to enhance your financial profile before applying for a mortgage.
6. Seek Out Special Loan Programs
Various programs are available specifically designed to help buyers avoid PMI. Some lenders offer loans where PMI is waived entirely for specific buyer categories, such as veterans or first-time homebuyers. Research local programs available in Washington and consult with a mortgage broker to find options that fit your needs.
7. Refinance After Home Appreciation
If you initially needed to pay PMI due to a lower down payment, monitor your home’s appreciation over time. Once your home’s equity reaches 20%, you can refinance your mortgage to eliminate PMI. Keep an eye on real estate trends in your area to determine the right timing for refinancing.
By employing one or more of these strategies, you can significantly reduce or eliminate your PMI costs, making your home purchase more affordable. Always consult with a financial advisor or mortgage professional to explore options best suited to your financial situation. Taking proactive steps can lead to substantial savings on your mortgage in Washington.
