Private mortgage insurance (PMI) is a type of insurance that protects your lender in case you default on your mortgage. It’s required for conventional mortgages if you put down less than a 20% down payment.
While PMI primarily protects your lender, it also provides a way of getting approved for a mortgage even if you have a small down payment. That way you can start building equity in your home faster without having to wait until you’ve saved 20% down.
However, PMI comes at a cost and you’ll usually want to avoid it if you can. The good news is that there are ways to get a mortgage without PMI or to at least make plans to remove PMI payments down the line. We’ll show you how below.
How can I avoid paying PMI?
If you’re trying to avoid paying PMI, as Austin Hudspeth, a Real Estate Broker at Welcome to Whatcom, says, “The obvious answer is to put 20% down, but I recognize that it's a tall order in this housing market.”
Hudspeth notes that if you don’t have a 20% down payment, there are alternatives: “VA loans have no PMI if you qualify, or some lenders will even offer lender-paid PMI where they can roll it into a slightly higher interest rate. A few credit unions still do 80-10-10 piggyback loans.” Always talk to your lender about possible alternatives to paying PMI—you might be surprised by your options.
Here are some more details on how to avoid paying PMI if you don’t have a 20% down payment:
- VA loans: VA loans are available to military members and their families. Not only do they have no PMI but they also have no down payment requirements.
- Piggyback loans: These loans arealso called 80/10/10 loans. With a piggyback loan, you take out two loans at once. Your main mortgage covers 80% or less of the purchase price, so you avoid PMI. The second loan is typically 10% to 15% of the purchase price to give your down payment a boost, while the remainder comes from your personal savings. While a piggyback loan can help you avoid PMI, you’ll need to manage two monthly payments and additional closing costs and interest.
- Lender-paid PMI (LPMI): With LPMI, the lender will cover your PMI costs but usually in exchange for a higher interest rate. You’ll have to decide with your loan officer whether the savings through avoiding PMI justify the higher interest rate.
- Professional loan programs: Some lenders offer loan programs specifically for young professionals, like doctors and professors, who may have high student debt loads and limited savings but strong future potential earnings. These lenders will cover your PMI even if you don’t have a 20% down payment.
- FHA loans: Technically, FHA loans don’t have PMI. However, they do have Mortgage Insurance Premiums (MIP), which are similar and can actually cost you more than PMI over the life of your loan. However, if you have low credit, it might be worth paying MIP on an FHA loan if it’s the only mortgage you can qualify for.
How much does PMI usually cost?
PMI typically costs around 0.5% to 1.5% of your original loan amount annually, but it can sometimes be as high as 2%.[1] The specific amount varies by lender and depends on a number of factors, including your credit score, loan amount, and loan-to-value (LTV) ratio. While that range may not sound like much, it can add up over time.
For example, let’s say two people are considering buying a $300,000 house. The first buyer can only afford a 5% down payment, while the second buyer can put down 15%. Because the first buyer is considered higher risk, their PMI is 0.9%, which results in PMI payments of $2,565 per year or approximately $214 per month. The second buyer is lower risk, so their PMI is just 0.35%, which is $892.50 per year or about $74 per month.
Because of the wide range in PMI costs, it’s important to shop around and ensure your overall financial picture is as strong as possible before applying for a mortgage. As Alex Olivera, Broker/Owner at Patriot Mortgage Group, says, “If you have excellent credit, I've seen [PMI] be as cheap as $20/mo, but if you have low credit it can be very expensive.”
How do you pay for PMI?
In the vast majority of cases, PMI payments are simply a part of your monthly mortgage payments, alongside your principal, interest, and taxes. In some cases, you may be able to pay for your PMI upfront at closing, by splitting it between monthly and upfront payments, or by negotiating with the seller to have them cover it.
Will I be stuck with PMI for the life of the loan?
No, PMI is designed to be temporary. The Homeowners Protection Act of 1998 specifies clear PMI cancellation rules that lenders must follow. Once you’ve paid off enough of your principal balance that your LTV ratio is at least 80% (which would be equivalent to having a 20% downpayment or equity) you can request PMI be cancelled.[2]
Angela Tourville, Branch Manager at Annie Mac Home Mortgage, advises that, "It's up to the borrower to be attentive to the value and loan balance as the lender won't typically initiate the steps to remove PMI." Note that you’ll need to be current on payments and an appraisal may be required.
Once you’ve reached 78% LTV (or 22% equity), then your lender is legally required to cancel your PMI automatically. That said, check your mortgage statement and make sure they actually do so.
Also, note that these rules don’t apply to MIP for FHA loans. MIP is subject to different rules and is generally harder to remove than PMI. We’ll look closer at the difference between PMI and MIP below.
Is paying PMI on a mortgage worth it sometimes?
Yes, sometimes paying PMI is worth it. Avoiding PMI no matter what can be a bad financial decision in markets where home values are rising faster than you can save up for a down payment. You could be stuck chasing an ever-rising figure you’d need for a 20% down payment while missing out on the equity you would’ve built if you’d bought a house with a smaller down payment.
For example, let’s say you’re saving for a 20% down payment on a $300,000 house. You currently have 10% ($30,000) and you plan on saving the other $30,000 over the next three years. However, if house prices are rising by 5% annually, that house will cost around $350,000 in three years, meaning you’ll need a down payment of $70,000 instead of $60,000. Even worse, you’ll have missed out on the additional $50,000 in equity you could have built during that time, thanks to rising home values.
As Hudspeth says, “I've seen buyers wait three extra years to save up 20% and, in that time, home prices jumped 15%. They ended up paying more for the house than they would have paid in PMI. The math isn't always intuitive. If you're in a market that's appreciating and you're ready to buy, paying PMI to get in the door can actually be a good move.”
What’s the difference between PMI and MIP?
PMI and Mortgage Insurance Premiums (MIP) serve similar functions in that they both protect the lender in case you default on your mortgage. PMI is for conventional mortgages and MIP is for FHA loans.
While PMI and MIP have similar purposes, they work differently for borrowers. PMI applies to conventional loans where the down payment is less than 20%. Your actual rate will vary depending on your credit score and overall financial profile. Plus, PMI can be removed when you reach 80% LTV.
MIP is required on FHA loans regardless of your down payment amount and costs 1.75% upfront plus a monthly premium. If your down payment is less than 10%, you have to pay MIP for the life of your loan. If your down payment is over 10%, then MIP lasts for 11 years.
Because MIP lasts longer than PMI typically does, it’s usually a better idea to choose a conventional mortgage with PMI so long as you have good credit and can get a competitive rate. However, if you end up with an FHA loan, you can eventually refinance to a conventional loan once you reach 80% LTV in order to get rid of the MIP payments.
Get advice from an expert
If you’re debating which mortgage option is right for you, the loan officers at Best Interest Financial can help. They have years of industry expertise and a solution-driven approach to show you which home loans best fit your financial profile and homeownership goals. Get a free 60-second quote from Best Interest today.
FAQ about PMI
Why is my PMI so high?
Your PMI might be high because your down payment was very low, your credit score is low, or something else in your financial history deems you a higher risk to lenders. PMI varies by lender and is based on your total financial profile. If your credit score is low, you may want to improve it before applying for a mortgage or explore low-credit options, such as FHA loans.
Is it better to put 20% down or pay PMI?
It depends on your goals and your local market. While putting down 20% avoids PMI, you’ll also have to wait longer in order to save that amount. During that time, you lose out on building equity, especially if you live in an appreciating market.
How much is PMI on a $300,000 mortgage?
PMI is usually between 0.5% and 1.5% of the original loan amount annually. That means you'll pay between $1,500 and $4,500 in PMI on a $300,000 mortgage, which is somewhere around $125 to $375 per month. However, PMI can be both lower and higher than that range depending on your financial profile and lender.
Does PMI go away after 10 years?
PMI might go away after 10 years but it depends on your situation. PMI cancellation is based on your loan-to-value (LTV) ratio. Once you reach 80% LTV, you can request PMI be dropped from your loan. Otherwise it’ll be cancelled automatically at 78% LTV (but you should always still check with your lender to make sure this happens).
Can home value increases remove PMI?
Increased home value could help you remove PMI but it won’t happen automatically. You’ll need to contact your lender and request a new appraisal. If your home value has increased so that you now have at least 20% equity in your home, your lender will likely cancel your PMI. However, some lenders may require at least two years of PMI and you’ll need to be current on your payments.
Disclaimer: The information provided in this article is for informational and educational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Mortgage rates, terms, products, and eligibility requirements are subject to change without notice and vary based on individual circumstances, credit profile, property type, loan amount, and other factors. All loans are subject to credit approval. This content does not constitute a commitment to lend or an offer of specific loan terms. For personalized mortgage advice and to discuss loan products that may be suitable for your situation, please contact one of our licensed loan officers.