What Is PMI and How to Avoid It (Down Payment Strategies)

The Price of Low Down Payments

Buying a home usually requires a down payment. The "gold standard" is 20%. If you put down less than 20%, lenders view you as a higher risk. To mitigate that risk, they require you to pay for Private Mortgage Insurance (PMI).

Crucially: PMI protects the lender, not you. If you stop paying your mortgage, PMI pays the bank. You still lose the house.

How Much Does PMI Cost?

PMI typically costs between 0.5% and 1.5% of the loan amount per year.

Example:

• Loan Amount: $400,000
• PMI Rate: 1%
• Annual Cost: $4,000
• Monthly Cost: $333

That is $333 a month that does not go toward principal, interest, or your own insurance. It effectively evaporates.

How to Avoid Paying PMI

1. Put 20% Down

The simplest method. If you buy a $500,000 home, you need $100,000 cash. This is a high hurdle for many first-time buyers.

2. Piggyback Loans (80/10/10)

This involves taking out two loans simultaneously:

• First Mortgage: 80% of the home value (no PMI).
• Second Mortgage (HELOC): 10% of the home value.
• Down Payment: 10% cash.

You avoid PMI, but now you have two loan payments, and the second one often has a higher, variable interest rate.

3. Lender-Paid PMI (LPMI)

The lender pays the PMI for you in exchange for charging you a higher interest rate (e.g., 6.75% instead of 6.5%).

• Pro: Lower monthly payment potentially.
• Con: You have that higher rate for the life of the loan. You can't cancel it like regular PMI without refinancing.

How to Get Rid of PMI

If you already have PMI, you aren't stuck with it forever (on conventional loans).

1. Automatic Termination: When your loan balance hits 78% of the original home value, the lender must cancel PMI automatically.
2. Request Cancellation: Once your balance hits 80% of the original value, you can write to your lender to request cancellation.
3. Appraisal (Market Value): If your home value has gone up significantly, you might have 20% equity based on the current value. You can pay for an appraisal to prove this to the lender.

(Note: FHA loans work differently. FHA Mortgage Insurance Premium (MIP) often lasts for the life of the loan unless you put 10% down initially.)

Summary

PMI isn't evil; it allows people to buy homes sooner. But it is a cost you should aggressively try to eliminate.

Check how PMI impacts your monthly budget with our Mortgage Payment Calculator.