You hear all the time that you need a 20 percent down payment or you pay PMI (Private Mortgage Insurance). But, that’s not always the case. There are a few ‘sneaky’ ways around it, helping you save money monthly and over the life of the loan.
Check out the top ways to save money on your mortgage payment without putting a lot of money down.
Apply for a Piggy Back Loan
To avoid PMI you need 20 percent down, but that doesn’t mean 20 percent of your own funds. In this case, you only need 10 percent down. The remaining 10 percent is a second loan.
You may hear this called the 80/10/10 mortgage. You borrow 80 percent from your first mortgage lender, you put 10 percent down from your own funds, and the remaining 10 percent is a home equity loan.
You can often get the second mortgage from the same lender as the first. If not, there’s no rule that you have to get the mortgages from the same lender, just as long as you have the full 20 percent down payment at the closing, you can avoid PMI.
Ask for Lender Paid Mortgage Insurance
Sometimes lenders will cover your PMI, hence the name lender-paid mortgage insurance. There’s a catch, though. Lenders obviously don’t pay the PMI out of the kindness of their hearts. Instead, they charge you a higher interest rate. They make up for the PMI premiums with the higher interest they earn on your loan.
You may pay between 0.5 percent to 0.875 percent more in your rate, but if you don’t want PMI, it may be worth it. Work out the difference in the extra interest you’d pay on the loan versus the cost of PMI over the time you’d pay it (you only pay PMI until you owe less than 80 percent of the home’s value).
Determine if you Qualify for a No Down Payment Loan
If you are a veteran of the military (or active military member with 180 days of service), you may qualify for VA financing. The VA loan doesn’t require a down payment or mortgage insurance – it’s a win-win for veterans that don’t have the large down payment and need flexible underwriting guidelines.
VA loans have flexible guidelines including no down payment and credit scores as low as 620 because of the VA’s backing. If a veteran defaults on his/her loan, the VA will pay the lender back a portion of the amount they lost. This makes it easier for veterans to secure home financing with no down payment.
If you don’t have 20 percent to put down on a home, you have options. FHA loans are a great option, but they charge mortgage insurance, so you must figure that into your budget. If you want to avoid mortgage insurance, a piggy back loan or lender-paid mortgage insurance are your best options, giving you the best of both worlds – flexible financing options without paying PMI.
