Ways to Avoid Paying Private Mortgage Insurance (PMI)

Quick answer

• Save up for a down payment of 20% or more on your home purchase.
• Explore loan options that don’t require PMI, such as VA loans or USDA loans for eligible borrowers.
• If you already have PMI, track your loan-to-value ratio and request cancellation once you reach 20% equity.
• Consider a “piggyback” loan (an 80-10-10 or 80-15-5 loan) to avoid PMI on the primary mortgage.
• Refinance your mortgage once you have enough equity to eliminate PMI.

What to check first (before you buy or change coverage)

When purchasing a home, understanding Private Mortgage Insurance (PMI) is crucial. PMI is an insurance policy that protects the lender if you fail to repay your mortgage. It’s typically required when your down payment is less than 20% of the home’s purchase price. Before you commit to a mortgage that includes PMI, or if you’re considering ways to get rid of it, review these key areas.

Coverage needs

Your primary need is to secure a mortgage that fits your financial situation. If your savings are limited, a mortgage requiring PMI might be your only option to buy a home. However, it’s important to understand that PMI adds to your monthly housing costs. Assess how much you can comfortably afford for your down payment and monthly mortgage payments, including any potential PMI.

Deductibles and premiums

In the context of PMI, there isn’t a “deductible” in the traditional insurance sense. The cost of PMI is usually rolled into your monthly mortgage payment as a premium. This premium can vary based on your credit score, loan amount, and the lender’s risk assessment. Understanding the estimated monthly cost of PMI is vital for your budget.

Exclusions and limits (general)

PMI policies themselves don’t typically have “exclusions” in the way homeowners insurance does. The policy’s purpose is to cover the lender’s risk on the loan principal. However, the loan terms may have limits or conditions related to PMI, such as how long it will be required or the criteria for its cancellation. Always review your mortgage agreement carefully for any specific clauses.

Claim process

The “claim process” for PMI is not something you, as the homeowner, initiate. If you default on your mortgage, the lender would file a claim with the PMI provider to recoup their losses. Your focus should be on making your mortgage payments on time to avoid any default scenarios.

Bundling and discounts (general)

While you can’t typically “bundle” PMI with other insurance policies for discounts, lenders might offer incentives or slightly better terms on mortgages with PMI if you have other financial products with them, such as checking or savings accounts. It’s always worth asking about any potential relationship discounts, though the primary way to reduce costs is by avoiding PMI altogether or working towards its cancellation.

Step-by-step (simple workflow)

Here’s a straightforward workflow for navigating PMI when buying a home or working to eliminate it from an existing mortgage.

1. Assess your savings for a down payment.

• What to do: Determine how much money you have available for a down payment.
• What “good” looks like: You have saved 20% or more of the home’s purchase price. This allows you to avoid PMI from the outset.
• Common mistake and how to avoid it: Underestimating closing costs and other homeownership expenses. Avoid this by creating a comprehensive budget that includes these additional costs beyond the down payment.

2. Research loan types.

• What to do: Investigate different mortgage options available to you.
• What “good” looks like: You identify loan programs like VA loans (for eligible veterans) or USDA loans (for rural properties) that do not require PMI, or you confirm a conventional loan where you can meet the 20% down payment threshold.
• Common mistake and how to avoid it: Only considering conventional loans. Avoid this by talking to multiple lenders and exploring all loan programs you might qualify for.

3. Secure your mortgage.

• What to do: Apply for and secure the mortgage that best suits your situation.
• What “good” looks like: You have a loan agreement in place. If a conventional loan requires PMI, understand the exact monthly cost and how long it’s projected to last.
• Common mistake and how to avoid it: Not fully understanding the terms of your mortgage, especially regarding PMI. Avoid this by reading all loan documents carefully and asking your loan officer to clarify anything you don’t understand.

4. Make timely mortgage payments.

• What to do: Consistently pay your mortgage bill on or before the due date each month.
• What “good” looks like: Your payment history is perfect. This is essential for building equity and eventually canceling PMI.
• Common mistake and how to avoid it: Missing payments or paying late. This can lead to late fees, damage your credit score, and prolong the period you pay PMI. Set up automatic payments or reminders to prevent this.

5. Track your home’s equity.

• What to do: Monitor the value of your home and the remaining balance of your mortgage.
• What “good” looks like: You regularly check your loan statements and potentially your home’s estimated market value to see when your loan-to-value (LTV) ratio drops to 80% or below.
• Common mistake and how to avoid it: Assuming PMI will automatically disappear. Avoid this by actively tracking your equity; you often need to request cancellation.

6. Request PMI cancellation (once eligible).

• What to do: Once your mortgage balance is 78% of your home’s original value (or 80% if you’ve made improvements or home values have risen), contact your lender to request cancellation.
• What “good” looks like: Your lender confirms PMI cancellation, and your monthly payment decreases.
• Common mistake and how to avoid it: Waiting too long after reaching the equity threshold. Avoid this by knowing the rules and proactively contacting your lender once you meet the criteria.

7. Consider a home appraisal.

• What to do: If your home’s value has significantly increased since you purchased it, and you believe your equity is now 20% or more, you may be able to request an appraisal.
• What “good” looks like: A professional appraisal confirms your home’s current value, demonstrating you have sufficient equity to eliminate PMI.
• Common mistake and how to avoid it: Not using an appraisal when home values have risen. Avoid this by understanding that lenders often use the original purchase price for cancellation calculations unless an appraisal proves otherwise.

8. Explore refinancing.

• What to do: If you have significant equity and your credit score is strong, consider refinancing your mortgage.
• What “good” looks like: You secure a new mortgage with a lower interest rate or different terms that does not require PMI, effectively replacing your old loan.
• Common mistake and how to avoid it: Refinancing without understanding the costs involved. Avoid this by calculating all closing costs associated with the refinance and ensuring the savings outweigh these expenses.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Not saving for a 20% down payment	You’ll likely have to pay PMI, increasing your monthly mortgage costs.	Save diligently until you can afford at least a 20% down payment. Explore loan options that don’t require PMI if saving is challenging.
Assuming PMI is automatically removed	You continue to pay for PMI long after you’ve built up sufficient equity, costing you more money over time.	Understand the Homeowners Protection Act (HPA) rules and your lender’s specific cancellation policies. Actively track your equity and request cancellation when eligible.
Ignoring PMI cancellation requirements	You miss the opportunity to eliminate PMI, leading to unnecessary expenses.	Familiarize yourself with the HPA, which outlines when PMI must be terminated. Contact your lender to initiate the cancellation process when you meet the equity thresholds.
Not considering alternative loan programs	You might miss out on options like VA or USDA loans that don’t require PMI for eligible borrowers.	Research all available mortgage programs, including those for specific groups (e.g., veterans, rural residents), to find one that suits your needs without PMI.
Not understanding your loan-to-value (LTV) ratio	You won’t know when you’ve reached the equity level required to cancel PMI.	Regularly review your mortgage statements and home value estimates to track your LTV. Aim to get it below 80% and then below 78% for automatic cancellation.
Not getting a home appraisal when values rise	Your lender might base PMI cancellation on the original purchase price, even if your home’s value has increased.	If you believe your home’s value has significantly increased, request a new appraisal to demonstrate sufficient equity for PMI cancellation. This may incur a fee.
Not budgeting for PMI costs	PMI can strain your monthly budget, making it harder to meet other financial obligations.	Include the estimated PMI premium in your housing budget from the start. Look for ways to accelerate equity building to reduce the duration of PMI payments.
Refinancing without calculating costs	You might end up paying more overall if the refinance costs outweigh the savings from eliminating PMI.	Carefully calculate all closing costs associated with refinancing and compare them to the total PMI payments you would have made. Ensure the long-term savings are substantial.
Not maintaining good credit	A lower credit score can result in higher PMI premiums or make it harder to qualify for refinancing.	Prioritize paying bills on time, managing debt, and checking your credit report regularly. Good credit is key to favorable mortgage terms and PMI elimination.

Decision rules (simple if/then)

Here are some decision rules to help you navigate PMI:

• If your savings allow for a 20% down payment on a home purchase, then make that down payment to avoid PMI altogether because it immediately removes the lender’s need for that insurance.
• If you are an eligible veteran or active-duty military personnel, then explore VA loans because they typically do not require PMI.
• If you are looking to buy a home in a designated rural area, then investigate USDA loans because they also do not require PMI for eligible borrowers.
• If you have less than 20% for a down payment on a conventional loan, then be prepared to pay PMI because it’s a standard requirement for lenders in this situation.
• If your mortgage balance reaches 80% of your home’s original purchase price, then you can request PMI cancellation from your lender because this is a common threshold.
• If your mortgage balance reaches 78% of your home’s original purchase price, then PMI must be automatically terminated by your lender according to federal law (Homeowners Protection Act).
• If your home’s market value has significantly increased since purchase, then consider ordering a new appraisal to demonstrate sufficient equity for PMI cancellation because lenders may use an appraised value to determine equity.
• If you have a strong credit score and significant equity, then consider refinancing your mortgage because a new loan might offer better terms and eliminate PMI.
• If you are struggling with the monthly cost of PMI, then look for ways to make extra principal payments on your mortgage because this will accelerate your equity growth and shorten the time you pay PMI.
• If you are considering a “piggyback” mortgage (e.g., an 80-10-10 loan), then understand that this involves taking out a second mortgage, which can have its own interest rate and fees, but helps avoid PMI on the primary loan.

FAQ

What is PMI?

PMI, or Private Mortgage Insurance, is a type of insurance policy that protects your mortgage lender if you fail to repay your loan. It’s typically required when your down payment is less than 20% of the home’s purchase price.

How much does PMI cost?

The cost of PMI varies but generally ranges from 0.5% to 1.5% of the loan amount annually. This cost is usually paid as a monthly premium added to your mortgage payment.

When can I cancel PMI?

You can typically request cancellation when your loan-to-value (LTV) ratio reaches 80%. Your PMI must be automatically terminated by the lender when your LTV reaches 78%, based on the original amortization schedule.

Does PMI apply to all mortgages?

No, PMI is primarily associated with conventional loans where the down payment is less than 20%. Government-backed loans like FHA loans have their own mortgage insurance premiums, and VA loans generally do not require any mortgage insurance for eligible borrowers.

Can I avoid PMI if I have less than a 20% down payment?

Yes, by exploring government-backed loans like VA or USDA loans if you qualify, or by considering alternative financing structures like a “piggyback” loan, though these have their own considerations.

What is a “piggyback” loan?

A piggyback loan, often structured as an 80-10-10 or 80-15-5 loan, involves taking out a first mortgage for 80% of the purchase price and a second mortgage (or home equity loan) for 10% or 15%. This allows you to avoid PMI on the primary mortgage by putting down a smaller initial cash payment.

Will my PMI premium change over time?

The PMI premium is usually fixed for the life of the PMI coverage. However, if you refinance your mortgage, you might get a new PMI premium or eliminate it entirely, depending on the terms of the new loan.

What happens if I stop paying PMI?

You cannot unilaterally stop paying PMI. It’s a contractual obligation tied to your mortgage. Failure to pay could lead to default on your mortgage.

What this page does NOT cover (and where to go next)

• Specific loan program eligibility requirements (e.g., VA loan criteria, USDA income limits).
• Detailed comparisons of different lenders and their specific PMI policies or refinance rates.
• The process of appealing a denied PMI cancellation request.
• The nuances of PMI for investment properties or unique financing situations.
• Tax implications of mortgage interest and PMI deductions (which have changed).
• Detailed explanations of mortgage-backed securities and how PMI fits into the broader financial market.