What is PMI and How to Avoid It

If you’re a first-time homebuyer, acronyms like private mortgage insurance (PMI) can be confusing. If you don’t know what PMI is, we’re here to help you understand the concept and ways around it.

Just what is PMI?

If you plan to purchase a home with little to no money to put down, lenders deem you a bit of a risk. In these cases, lenders typically require you to take out PMI if you can’t put down at least 20% of the purchase price.

PMI isn’t just a one-time insurance payment. With PMI, you pay monthly premiums as part of your mortgage payment to the bank. You’ll do this until you pay an amount equal to 20% of the mortgage, at which point you can ask to cancel the insurance. If you happen to forget, don’t panic. Your lender is required to cancel the insurance once you pay 22%. Keep in mind, however, that the rules are somewhat different for federally guaranteed loans. For instance, VA loans don’t require PMI, yet have “funding fees,” while FHA loans may require PMI payments throughout the life of the loan.

With so many variables, it can take years of paying costly premiums before you reach these thresholds. Since the cost of PMI – which ranges between 0.5% and 1.5% of your monthly mortgage[1] amount – can quickly add up, there are steps you can take to avoid PMI.

How to Avoid PMI

So does this mean you have to make a 20% downpayment to avoid PMI? Not exactly. The key to avoiding PMI is understanding your options. Talk to your buyer’s agent or lending officer about how you can reduce or eliminate PMI. Some common methods include:

• Up-Front Premium: With this option, you pay the full premium in one lump sum up front, which will total less than what you’d pay out monthly over time. The downside is that if you move again soon, you won’t get the premium refunded.
• Federal Loan Programs: Some mortgage products don’t require PMI. FHA, VA and USDA loans have pre-set fees on loan products to avoid the additional costs of PMI.
• Piggyback Mortgage: Another way to eliminate PMI payments is to take out a second loan to cover the 20% down payment. These rates can be high, so make sure the interest and terms are more favorable than you’d be paying with PMI.
• Lender-Paid Mortgage Insurance: Sometimes, lenders may allow you to avoid paying PMI through lender-paid mortgage insurance (LPMI). In this case, the lender adjusts your mortgage rate to cover the cost of PMI, which may be viewed as a benefit to homeowners who deduct home interest costs.
• Low-Downpayment Products: Some lenders may offer conventional mortgages without PMI even if you put down less than 20%. But if they waive PMI, the interest rates will be higher so you’ll have to calculate whether these options make financial sense.
• PMI-Free Products: Some lenders offer loans without PMI to help first-time buyers that take into account an individual’s specific eligibility while others may require a certain minimum credit score.

As you look to make your next move, keep these tips in mind for reducing – or, even eliminating – PMI. Ready to get started? 

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[1] Lucas, T. (February 14, 2020) Mortgage insurance: What is it, why you need it, and how much it costs. TheMortgageReports.com. Retrieved February 28, 2020 from https://themortgagereports.com/24154/private-mortgage-insurance-pmi-cost-low-downpayment-return-on-investment

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