How to avoid PMI
How to avoid PMI while still putting less than 20% down
Private Mortgage Insurance, or PMI, is an annoyance that nearly every homeowner has had to deal with at some point. The simple fact is that most first time homebuyers don't have the ability to put down the 20% or more that banks require, so PMI is slapped onto their monthly payment to ensure that the bank gets paid - even if the homeowner defaults. It doesn't help that real estate is appreciating at a rapid pace across the country, making it even harder to meet the 20% downpayment threshold.
Bottom line: more people than ever are looking at PMI as a foregone conclusion if they want to be homeowners. But, there are ways to get around PMI without putting more than 20% down. Read on to learn more...
Avoiding PMI by using an equity partner
The world of finance is exceedingly complex, but there are really only two ways to raise money from other people: rent it from them by borrowing, or sell a part of your ownership. The vast majority of homeowners choose to borrow money from the bank in order to pay for their home. It's easy, and there is a huge network of banks and mortgage companies that make it easy.
But, there is also a way to sell a portion of your ownership in your home in exchange for equity. Or in the case or new homeowners, you can take on a partner like Unison (or it's competitor Point) who will give you a cash payment in exchange for equity in your home.
Here's an example to make it a little easier. Let's say I am buying a $500k house. Ordinarily, I would need to come up with $100k for a downpayment, but I only have $50k. Unison will fork over the other $50k in exchange for a share of the appreciation in the home (in this example, let's say that they have a 35% stake in any value gained above the $500k purchase price). Because I am putting $100k down, the bank does not need to apply PMI. The best part is that there are no monthly payments for Point or Unison since they are purchasing a share of the ownership in the home.
When I sell, Unison will take 35% of the appreciation, but I get to hang on to the rest as normal. There is one downside: if the home goes down in value and I sell, then I would have to shoulder most of the losses. Here's more detail on how this works:
Avoiding PMI with a primary mortgage and an alternative loan
If you can afford the monthly payments that PMI would bring, but you don't want to throw the money down the drain, then a second mortgage or loan would help to get around it. The concept is fairly simple: if you can borrow enough money to ensure that your down payment is over 20%, then you won't have to worry about PMI.
This isn't necessarily a foolproof system. Lenders will look into total indebtedness and people who are already up to their eyeballs in debt are much less likely to get approved for their mortgage. However, those who have the income to cover the payments (and still survive), could easily use this method to avoid PMI.
Some mortgage brokers will help buyers set up two mortgages to achieve exactly this. In my mind, it would be much easier to get a personal loan through Lending Tree, provided that the amount needed wasn't too high. The other benefit to using a personal loan is that they are significantly easier to get, although the rates may be higher.
Avoid PMI by using a lender that doesn't require it!
The easiest way to avoid PMI is by using a lender that doesn't require it for down payments below 20%. In my native San Francisco, the San Francisco Federal Credit Union has a program they call "POPPYloan" which enables VERY high earning households to finance up to 100% of their home purchase, up to $2 million. The program is only available for 9 Bay Area counties, but for those of us in San Francisco it's certainly a viable option.
The only hesitation I would have with this program is that it locks you into a huge mortgage payment. That's a bit of an inevitability in San Francisco anyway, but it does give me a little bit of pause. If it were me, and I didn't have the money for a 20% down payment, I would probably still prefer to use Unison as an equity partner than lock myself into a gigantic mortgage payment for years to come. I am sure there are people who would look at Unison as an enormous ripoff, though. Different strokes for different folks!
Conclusion: PMI is not a necessity!
The bottom line is that you don't have to put up with PMI. If you are creative, there are lots of ways to get around it. There are also lots of ways to get rid of it, which I detailed in a dedicated post on the matter before. If you have PMI and you want to calculate if you've reached the threshold to remove it, simply scroll down!
Here's to no PMI!