If you’re attempting to buy a home with a small down payment, you've likely encountered the term PMI, or Private Mortgage Insurance. While PMI helps you get into a house sooner, it comes at a stark premium that benefits the lender, not you.
What is PMI?
PMI is a specialized insurance policy that protects the lender if you stop making payments and default on your loan. It does not protect you from foreclosure. Lenders typically require PMI on conventional loans if you provide a down payment of less than 20% of the home’s purchase price. The cost of PMI varies but generally ranges from 0.5% to 1.5% of your original loan amount each year, added directly to your monthly payment.
Strategy 1: 20% Down Payment
The most definitive way to avoid PMI is to simply save until you have an amount equal to 20% of the home's purchase price. This immediately signals to the lender that you are a low-risk borrower.
Strategy 2: Piggyback Loans (80-10-10)
In a piggyback setup, you take out two loans simultaneously. The first mortgage covers 80% of the home's value, the second loan (often a home equity line of credit) covers 10%, and you provide the remaining 10% in cash as a down payment. Because the primary mortgage relies on 80% LTV, PMI is waived. You must ensure the interest on the second loan is cheaper than paying standard PMI for this strategy to be viable.
Strategy 3: Lender-Paid Mortgage Insurance (LPMI)
With LPMI, the lender technically pays the PMI for you. However, to compensate for this, they will permanently increase your interest rate over the life of the loan. While this looks attractive initially, an inflated interest rate often costs more in the long haul than standard temporary PMI.
How to Cancel Existing PMI
Once you have paid down your mortgage balance to 80% of the home's original appraised value, you can submit a written request to your lender to cancel PMI. By law, it must automatically terminate once your balance reaches 78% of the original value, provided your payments are current. If you believe your home's value has significantly increased due to market shifts or renovations, you can also pay for a new appraisal to prove you now have 20% equity.