If you're buying a home with less than 20% down, you might be required to pay Private Mortgage Insurance (PMI)—an extra cost that protects the lender, not you. Let’s explore what PMI is, how much it costs, and how you can potentially avoid it.
What Is PMI?
PMI is an insurance policy that lenders require when a borrower puts down less than 20% on a conventional home loan. It protects the lender in case you stop making payments, but it adds an extra expense to your monthly mortgage payment.
Why Do Lenders Require PMI?
Lenders view loans with less than 20% down as higher risk. PMI helps offset that risk by ensuring they recover losses if the borrower defaults. Once you reach 20% equity in your home, you can request PMI removal.
How Much Does PMI Cost?
PMI costs typically range from 0.5% to 1% of your loan amount per year. Here’s a breakdown for a $300,000 mortgage:
- Upfront cost: $1,500 at closing (if required)
- Monthly cost: $125–$250 added to your mortgage payment
- Total over five years: $7,500–$15,000 in additional costs
Ways to Avoid PMI
If paying PMI doesn’t fit your budget, consider these alternatives:
- Increase Your Down Payment: Even putting down 18-19.99% may help reduce or eliminate PMI.
- Explore Loan Programs Without PMI: VA loans (for eligible veterans) and USDA loans (for rural buyers) do not require PMI.
- Use an 80/10/10 Loan: Also known as a piggyback loan, this strategy involves:
- 80% primary mortgage
- 10% secondary loan
- 10% down payment
This setup helps avoid PMI by reaching the 20% down threshold.
- Refinance When You Reach 20% Equity: If you already have PMI, refinancing into a new loan once your home gains value can help remove it.
Should You Pay PMI Upfront?
Some lenders offer single-premium mortgage insurance, which lets you pay PMI upfront at closing instead of adding it to your monthly payment. This could save money long-term, but it requires more cash upfront.
Key Takeaways
- PMI adds to your mortgage costs if you put down less than 20%.
- It protects the lender, not the borrower.
- There are ways to avoid PMI, such as VA/USDA loans, piggyback loans, or a larger down payment.
- Once you reach 20% equity, you can request PMI removal or refinance.
PMI helps lenders cover the risk of low-down-payment loans, but it can add up quickly. If you’re able to make a larger down payment or explore other loan options, you could save thousands over the life of your mortgage. Do your homework, and you’ll make a smarter, more affordable home purchase.
Ready to buy a home? Contact us today to learn how you can save on PMI and find the best mortgage for you!