If you take out a home loan in Oregon and put less than 20% down, you’ll be required to pay for private mortgage insurance (PMI for short). PMI won’t insure you, but rather the lender. Primary Residential Mortgage, Inc. notes that it protects your lender against financial losses in case your property goes into foreclosure.
You won’t have to pay for its premiums separately because they’ll be added to your housing payments. However, they will increase your monthly mortgage expenses by $100 or more until they can be canceled. PMI can be costly, and it’s in your best interest to avoid it as much as possible.
If you can’t pay a 20% down payment, consider these strategies:
Prepay Your Mortgage
Your lender is required to remove it from your monthly payments when your mortgage’s loan-to-value (LTV) ratio drops to 78%. In other words, you’re required to pay for it for as long as the amount you owe isn’t equivalent to 78% of the value of your home.
It can take a while before you reach this percentage because most of your early payments go toward the interest. You need to count years before you can significantly reduce the principal.
To bring your mortgage’s LTV ratio to 78% faster, make extra payments because they go directly to the loan principal. Some lenders allow prepayment without restrictions, while others penalize it. Find out if you can prepay your loan penalty-free right from the start.
Get a New Appraisal
Other than principal reduction, home price appreciation is another key factor that pulls the LTV down to 78% quicker than anticipated. Get your home professionally appraised to know whether you’ve built 20% equity on your property. If you do, you can make it the appraisal as a basis to eliminate the PMI early.
Take Out a Piggyback Loan
A piggyback loan is the second mortgage that sits behind the first. You can apply for two mortgages concurrently to meet the 80% LTV requirement and avoid PMI. Maintaining more than one home loan causes you to pay more interest over time. To save on interest and potentially get a better mortgage rate, you can refinance your loan after building 20% equity on it.
Considering that it serves you no purpose, personally, explore every possible way to get rid of PMI early or completely. With adequate mortgage knowledge and creativity, you can keep PMI from becoming a burden.