How to Avoid PMI in California, With a Slightly Higher Rate

Summary: It’s possible to avoid PMI in California by taking on a slightly higher interest rate. In exchange, the lender will pay your policy for you. Read on to learn more about this and other strategies for avoiding mortgage insurance in the Golden State!

Home buyers and mortgage shoppers in California tend to have a lot of questions when it comes to private mortgage insurance, or PMI. One of the most frequently asked questions is: How can I avoid paying PMI in California? We’ve covered this topic before, and today we will revisit it from a different angle.

But first, let’s take a brief look at what PMI is, and why some borrowers have to pay it.

Definition of Private Mortgage Insurance

California private mortgage insurance, or PMI, is a specialized type of insurance policy that protects mortgage lenders from financial losses that may result from borrower default or failure to repay.

This type of insurance can be applied to both FHA and conventional home loans. When it’s applied to a conventional (non-government) loan, it’s referred to as private mortgage insurance. That’s because the insurance is provided by a private-sector company, and not by the government.

A PMI policy is generally required whenever the loan-to-value (LTV) ratio rises above 80%. This is often the case when a borrower makes a down payment below 20%.

Private mortgage insurance isn’t a bad thing. Yes, it brings added costs for some borrowers. But there are benefits as well. The biggest benefit is that it allows you to buy a house sooner, without saving up for a 20% down payment. Also, California PMI policies can usually be cancelled once the homeowner pays down the mortgage balance to the point that the LTV reaches 80% or below.

Related: A guide to mortgage insurance

Now we know what private mortgage insurance is, and why it’s needed in some cases. Let’s talk about how to avoid paying PMI in California.

How to Avoid PMI in California, Revisited

In a previous lesson, we talked about the 80/10/10 piggyback mortgage strategy. This is one way to avoid PMI in California. With this strategy, the borrower takes out a first mortgage loan for 80% of the purchase price, uses a second loan for 10%, and then pays the remaining 10% out of pocket as a down payment. Neither the first nor second mortgage has an LTV ratio above 80%, so mortgage insurance is not necessary.

That’s one way how you might avoid PMI in California. But it’s not the only way. In many cases, borrowers can also avoid it by taking on a slightly higher rate.

Lender-paid mortgage insurance (LPMI) is one example of this strategy. This is where the borrower accepts a slightly higher interest rate in exchange for the lender paying the mortgage insurance premium up front, as a lump sum. Please contact us if you’d like to explore this strategy, to see how it might work out for you.

California is a big military state, so we have to mention the VA loan program as well. This is another way to avoid private mortgage insurance. Plus, it offers the added benefit of 100% financing, which eliminates the need for a down payment. If you’re a military member or veteran, it’s hard to beat the VA program. You could buy a house in California with no down payment and no PMI.

So we’ve covered a few strategies for avoiding PMI:

• You could make a down payment of 20% or higher.
• You could combine two loans, so neither of them has an LTV above 80%.
• You could also avoid PMI by taking on a slightly higher rate (LPMI).
• VA borrowers can usually sidestep mortgage insurance as well.

The important thing to realize here is that you have options, when it comes to the features of your home loan — probably more options than you realize. That’s why it’s so important to speak to a knowledgeable loan officer or broker, before making any decisions.