Private Mortgage Insurance (PMI) can be a costly addition to your monthly mortgage payment. Designed to protect lenders in case you default on your loan, PMI is typically required when your down payment is less than 20% of the home’s purchase price. While PMI may help you buy a home with less upfront cash, it’s an expense you’d likely prefer to avoid. Here’s how you can skip PMI and keep more money in your pocket.
What PMI actually costs: a worked example
PMI pricing varies, but a common rule of thumb is $30 to $70 per month for every $100,000 borrowed. Take a $400,000 home with 10 percent down: the loan is $360,000, so PMI runs roughly $108 to $252 a month, or about $1,300 to $3,000 a year. On a 30-year mortgage where PMI drops off after a few years, the lifetime cost is several thousand dollars. That is the number to compare against the alternatives below: a slightly higher rate on a piggyback loan is only worth it if it costs less than the PMI it replaces.
Save for a 20% Down Payment
The most straightforward way to avoid PMI is by saving enough for a 20% down payment. While this may take time, especially in high-cost areas, the benefits include lower monthly payments, less interest paid over the life of the loan, and the elimination of PMI costs.
Tips for Saving Your Down Payment
- Create a Budget: Use budgeting tools like Simplifi to track your expenses and identify areas where you can save.
- Cut Unnecessary Expenses: Embrace a frugal lifestyle to speed up your savings. Consider downsizing your living situation, canceling unused subscriptions, or cooking at home more often.
- Invest Wisely: Park your down payment funds in a high-yield savings account or consider short-term treasury bills for slightly higher returns without significant risk.
Opt for a Piggyback Loan
Another strategy to avoid PMI is the “80-10-10 loan” method, also known as a piggyback loan. Here’s how it works:
- You take out a first mortgage for 80% of the home’s value.
- You take out a second mortgage or home equity loan for 10%.
- You put down the remaining 10% as a down payment.
This approach avoids PMI because your primary mortgage is only 80% of the home’s value. However, the second mortgage may come with a higher interest rate, so weigh the costs carefully.
Consider Lender-Paid PMI
Some lenders offer an option to pay a higher interest rate in exchange for eliminating PMI. While this doesn’t technically avoid PMI, the costs are rolled into your loan rather than being an additional line item. This can make sense if you plan to stay in the home for the long term, as it’s often more cost-effective than monthly PMI payments.
Use a VA Loan (If Eligible)
Veterans, active-duty service members, and eligible surviving spouses can avoid PMI entirely by using a VA loan. These loans are backed by the Department of Veterans Affairs and offer favorable terms, including no PMI requirement and competitive interest rates.
Negotiate with Your Lender
In some cases, lenders may waive PMI if you demonstrate strong financial credentials, such as an excellent credit score, a stable income, or significant assets. While this is less common, it’s worth discussing your options with potential lenders before finalizing your loan.
Refinance to Remove PMI
If you already have PMI, you may be able to eliminate it through refinancing. Once your home’s equity reaches 20% (either through market appreciation or paying down your principal), refinancing to a new loan without PMI can save you money. Be mindful of closing costs and ensure the savings outweigh the expense.
PMI cancellation rules you should know
If you already have PMI on a conventional loan, you do not necessarily need to refinance to get rid of it. Under federal law, you can request cancellation once your loan balance falls to 80 percent of the home’s original value, provided you have a good payment history. And your lender must cancel PMI automatically once the balance reaches 78 percent of the original value. Track your amortization schedule and home value: many borrowers keep paying PMI months after they qualify to drop it, simply because nobody told them to ask.
Final Thoughts
PMI is an added cost that savvy homebuyers should aim to avoid. By saving diligently, exploring alternative loan structures, or leveraging your eligibility for specialized programs, you can steer clear of PMI and improve your overall financial health.
Remember, buying a home is one of the largest financial decisions you’ll make, so plan carefully and take advantage of tools and strategies that align with your long-term goals.
Winchell House 
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