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Summary: Before you take out a mortgage, you should understand that mortgage insurance might be required if your down payment amount isn’t over a certain amount. This article will discuss some ways to help you avoid paying mortgage insurance in Washington State to make your home loan more affordable.
When you are buying a home in Washington State, you may run into a number of hurdles to complete the purchase. One of the items that you may be asked to purchase is called “Private Mortgage Insurance,” often shortened to PMI. This is a unique insurance policy that your lender, such as the credit union or bank, may ask you to buy in order to protect themselves. In this insurance policy, the bank protects themselves against losing money if you end up defaulting on your Seattle or Bellevue loan.
It’s a unique type of loan because even though you are paying for it, it’s your lender that is benefiting from it. Unfortunately, if you are asked to purchase PMI, this will increase your monthly mortgage payment. Therefore, most people try to avoid it. Fortunately, there are a few ways to do this.
Typically, the lender will ask you to purchase PMI if your loan-to-value ratio is higher than a certain level. This ratio is a measure of the loan amount you require from your lender relative to the value of the home you plan to purchase. The higher the loan amount is relative to the property value, the more of a risk the lender will carry by issuing you a mortgage. That’s why lenders insist on PMI to help cover them in case you default.
In most cases, the lender will ask you to buy PMI if you put down less than 20 percent of the home’s purchase price. If you can come up with a 20% down payment, you can avoid paying PMI and therefore save yourself some money in the long run.
If you don’t have 20% in liquid assets there are other ways to come up with the down payment.
– Do you have an investment account? If you have money invested in stocks, mutual funds, index funds, etc. you can likely get a margin loan equal to a portion of those assets (usually around 50%). This is a quick an easy way to access capital without being required to sell assets which can have significant tax implications. Your financial advisor can work with you on a plan to utilize a short-term margin loan with a plan to pay it back selling your assets at the appropriate time.
– Borrowing from retirement – Another way to avoid PMI is to borrower from your 401k. This can often be a cheap way to come up with funds quickly; however, it is not a good long term solution and you should have a plan to pay back the loan as quickly as possible.
Another option to avoid PMI is to invest in something called a piggyback mortgage. In this case, you are splitting your Washington mortgage in two. For example, if you put down 10 percent, you would get a first mortgage for 80% of the purchase price and a second mortgage or Home Equity Line of Credit for the remaining 10%.
While this can help you avoid having to take out PMI the drawback of this policy is there will be a negative impact to the terms of the first mortgage when secondary financing is present. Additionally the second loan might have a higher interest rate than the first or have a variable rate feature adding risk if rates move higher.
One way to avoid negatively impacting the terms of the first mortgage is to put 20% down with one of the methods mentioned above and then open up a second mortgage or Home Equity Line of Credit after the purchase closes to pay back your margin or 401k loan.
Another option is to roll them into the cost of the loan. In this case, the you would either pay a slightly higher interest rate or pay higher upfront costs to buy out the monthly PMI premium. When choosing the option to pay a slightly higher rate you often will still maintain a lower payment that going with the monthly PMI option.
With that said there are many other factors to consider prior to deciding whether monthly PMI, lender paid PMI or upfront PMI are best for you. Examples include how long you plan on keeping the loan, when you could reasonably expect monthly PMI to be removed, the tax implications of monthly PMI vs. lender paid PMI just to name a few.
An experienced Loan Officer can help assist you in determining the right option based on your specific situation as well as the ever changing premiums for monthly and lender paid PMI.
Once you’ve accumulated enough equity in your home – either through making regular mortgage payments, through an increase in your home’s value, or both – you may be able to have your monthly PMI payments canceled. If you opt for the lender paid PMI option this is not applicable. It is important to know when a lender is required to remove PMI which you can find here PMI Removal.
While a lender can opt to remove PMI earlier you should not base your decision on which program to take regardless of what the lender tells you their policy is as they can change their requirements at any time. The only thing you can count on is getting the monthly PMI removed when they are required to do so.
These are 4 ways that you can avoid purchasing PMI in Washington which will help you keep your monthly payments low. As always, speak with your trusted mortgage professional for personal advice on your specific situation.
Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region that includes Idaho, Colorado, and Oregon. We offer a wide variety of mortgage programs and products with flexible qualification criteria. Please contact us if you have mortgage-related questions.
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