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Part of buying a home is researching the market and your finances. Most lenders require you to put at least 20 percent down or pay private mortgage insurance (PMI). Since PMI is a cost that does not lower your interest rate or principal, it’s almost always better to save up that hefty down payment. Lenders charge PMI to cover some of their risk if you do not put the 20 percent down to create equity. Conventional loans backed by Fannie Mae and Freddie Mac always require PMI if you do not put 20 percent down.
In some cases, you could avoid PMI by taking out a special loan or a VA loan. VA loans are only available to veterans, but require very little down or even zero down. The VA doesn’t actually give you the loan—it insures your loan against default. Conventional loans not backed by Fannie Mae or Freddie Mac often have higher interest rates. These two programs are also government-insured loans.
Other reasons to avoid paying PMI include:
Saving the Down Payment
In addition to saving for a down payment, you may qualify for some down payment assistance programs such as the first-time home buyer’s program. These programs help you get that 20 percent so that you do not have to pay PMI. If you have a retirement account, you may be able to use money from that account to help with a down payment.
Though it may seem painful to pay such a large chunk of money, it saves you from paying insurance premiums and it lowers the cost of the loan since you don’t pay interest on the down payment and it is applied to the principal.