Many lenders charge Private Mortgage Insurance (PMI) as an additional fee when your down payment on a home is less than 20 percent. This monthly cost can add up, but there are smart ways to get around it. Some buyers choose to make a larger payment upfront to avoid it, while others explore lender programs that do not require PMI. Certain loans may allow you to skip PMI by meeting specific criteria, so it’s essential to compare your options before making a decision.
Essential Steps to Avoid PMI on Your Home Loan
- Borrow or gather enough funds to make your down payment greater than 20 percent, ensuring you meet the lender’s requirements.
- Buy a less expensive property to keep the purchase price lower, making it easier to reach the greater down payment threshold.
- Negotiate with the seller to credit additional money toward your home purchase, increasing your down payment without extra cost.
- Find a lender willing to charge a higher interest rate instead of requiring PMI, which may be beneficial since all the interest is tax deductible.
| Step | Action |
| 1 | Borrow or gather enough funds to make your down payment greater than 20 percent, ensuring you meet the lender’s requirements. |
| 2 | Buy a less expensive property to keep the purchase price lower, making it easier to reach the greater down payment threshold. |
| 3 | Negotiate with the seller to credit additional money toward your home purchase, increasing your down payment without extra cost. |
| 4 | Find a lender willing to charge a higher interest rate instead of requiring PMI, which may be beneficial since all the interest is tax deductible. |
Effective Strategies to Eliminate PMI Costs
If you want to skip PMI, focus on strategies that help you meet the right conditions.
- Make sure your loan is paid down to 20% of the original amount, not just the purchase price, before making a request for PMI to be removed.
- Gather the necessary documentation, such as an appraisal, to prove to your lender that your home has gained enough value.
- Don’t expect your borrower to notify you automatically—it is not required by law, so you must check when you have reached the magic number of 80% loan-to-value.
- Keep an eye on legislation that could make lenders more responsive in sending a notification for PMI removal.
“A wise homebuyer is one who understands the costs beyond the purchase price.”
Utilizing the 80-10-10 Piggyback Loan Approach
- Some buyers take out a second mortgage (a home equity loan or HELOC) to cover part of the down payment, reducing the need for PMI.
- Example: A borrower puts down 10%, takes a second loan for another 10%, and finances the remaining 80%.
| Loan Type | Breakdown |
| First Mortgage | 80% of the home’s value |
| Second Loan (HELOC) | 10% of the home’s value |
| Down Payment | 10% paid upfront |
“Smart financing is not about avoiding payments but about making the right payments.”
Government-Backed Mortgage Options Without PMI
- VA Loans: Eligible veterans and service members can access VA loans with no PMI and no down payment.
- USDA Loans: Designed for rural buyers, USDA loans don’t require PMI but have a different type of insurance fee.
| Loan Type | Benefits |
| VA Loans | Eligible veterans and service members can access VA loans with no PMI and no down payment. |
| USDA Loans | Designed for rural buyers, USDA loans don’t require PMI but have a different type of insurance fee. |
“Invest in knowledge before investing in a home.”
Understanding Lender-Paid Mortgage Insurance (LPMI)
- Some lenders offer to pay PMI in exchange for a slightly higher interest rate, which might be cost-effective over time.
| Pros | Cons |
| Lower monthly mortgage payments | Higher interest rates for the life of the loan |
| No separate PMI payments | Can be more expensive in the long run |
“The best mortgage is the one that fits your long-term financial plan.”
FHA Loans vs. Private Mortgage Insurance (PMI): Key Differences
- While FHA loans require a different type of mortgage insurance (MIP), knowing the difference between PMI and MIP can help borrowers choose the best option.
| Feature | PMI | MIP |
| Applies to | Conventional Loans | FHA Loans |
| Can be removed? | Yes, after reaching 20% equity | No, remains for life of loan unless refinanced |
| Upfront Cost? | No | Yes, an upfront premium is required |
“A home is not just a purchase; it’s a financial decision that shapes your future.”
Frequently Asked Questions
What is Private Mortgage Insurance (PMI)?
PMI is a fee required by lenders when your down payment is less than 20%. It protects lenders if a borrower defaults but offers no benefits to homeowners.
Why do lenders require PMI?
Lenders require PMI to reduce their financial risk when buyers make a low down payment, ensuring they recover costs if the borrower defaults on the loan.
How can I get a mortgage without PMI?
You can avoid PMI by making a 20% down payment, using a piggyback loan (80-10-10 strategy), or opting for lender-paid mortgage insurance (LPMI).
Are there government-backed loans that don’t require PMI?
Yes, VA loans for veterans and USDA loans for rural homebuyers do not require PMI but may have other insurance fees.
What is the 80-10-10 loan strategy?
The 80-10-10 strategy involves an 80% primary mortgage, a 10% secondary loan, and a 10% down payment to eliminate the need for PMI.
How does Lender-Paid Mortgage Insurance (LPMI) work?
With LPMI, the lender covers PMI costs in exchange for a higher interest rate, which may be cost-effective over time but results in higher loan payments.
Can PMI be removed after getting a mortgage?
Yes, once you reach 20% home equity, you can request PMI cancellation. Lenders automatically remove it when you reach 78% loan-to-value (LTV).
What is the difference between PMI and FHA Mortgage Insurance Premium (MIP)?
PMI applies to conventional loans and can be removed, while MIP is required for FHA loans and often lasts for the loan’s lifetime.
Does a higher credit score help reduce PMI costs?
Yes, a higher credit score can lower PMI costs since lenders see you as less risky, reducing your monthly mortgage insurance payments.
Is paying PMI always a bad financial decision?
Not always. If PMI allows you to buy a home sooner while property values rise, it may be worth the cost instead of waiting to save 20% down.
Conclusion
Avoiding PMI can lead to significant savings over the life of your mortgage, and there are multiple strategies to achieve this goal. Whether through a larger down payment, piggyback loans, lender-paid options, or government-backed loans, understanding your choices can help you make a more informed financial decision. Be sure to compare loan programs, negotiate with sellers, and stay informed about PMI removal options as you build home equity. By carefully planning your mortgage strategy, you can reduce unnecessary costs and maximize your home investment.
Rhys Henry is a Luxury Realtor & Senior Partner at Tyron Ash International, specializing in South East London & Kent Division. A dedicated real estate agent, Rhys is passionate about helping clients navigate buying, selling, and investing in luxury properties with expert guidance and industry-leading strategies.