Private Mortgage Insurance (PMI): What It Is and How to Avoid It

Private Mortgage Insurance (PMI): What It Is and How to Avoid It

If you're buying a home with less than a 20% down payment, you'll likely encounter Private Mortgage Insurance (PMI). While it helps you get into a home sooner, it's an extra cost that benefits the lender, not you.

What is PMI?

PMI is an insurance policy that protects the lender if you stop making payments on your loan. It does not protect you or pay your mortgage if you lose your job.

How Much Does It Cost?

PMI typically costs between 0.5% and 1% of your loan amount annually. On a $200,000 loan, this could add $83 to $166 to your monthly payment.

How to Avoid PMI

1. 20% Down Payment: The most straightforward way to avoid PMI is to put down at least 20% of the home's purchase price.
2. Piggyback Loan: Also known as an 80-10-10 loan, this involves taking out a second mortgage to cover part of the down payment, keeping the first mortgage at 80% LTV.
3. Lender-Paid PMI: Some lenders offer to pay the PMI in exchange for a slightly higher interest rate. This can be beneficial if you plan to stay in the home for a short time.
4. VA Loans: Loans backed by the Department of Veterans Affairs do not require PMI, regardless of down payment size.

Once you reach 20% equity in your home, you can request to have PMI removed. It automatically cancels once you reach 22% equity based on the original amortization schedule.