This article appeared in SoFi's On the Money newsletter. Not getting it? Sign up here.

If you’re looking for a way into today’s pricey housing market, chances are you’ve at least considered putting down only 5% or 10% of the purchase price.

But when your down payment is less than the typical 20%, one of the trade-offs is having to get private mortgage insurance — an extra requirement that can easily cost an additional $100 to $200 a month, depending on the size of your loan. The good news? It’s one monthly expense that actually goes away eventually, and in today’s real estate market, that may be sooner than you think.

Whether you’re thinking about making a smaller down payment or already have private mortgage insurance (PMI) on your home, keep reading. There’s a trick to PMI that everyone should know about.

First, some quick background: PMI protects the lender in case you stop making your loan payments, and the premiums are usually rolled into your monthly mortgage payment. It’s a fairly standard requirement for conventional mortgage loans that cover more than 80% of a property’s value, with the thinking being that borrowers who can’t afford the standard down payment are more likely to run into trouble paying.

By law, lenders must cancel PMI automatically when your principal balance falls to 78% of your home’s original value, and you can request a cancellation as soon as it hits 80%. (Original value is either the purchase price or appraised value when you bought it, whichever is lower.)

But there’s another way to drop your PMI — and depending on real estate prices, it can be faster than waiting to meet those legal thresholds (which can often take four to 10 years, depending on your loan and other circumstances.)

Many lenders, including those following Fannie Mae and Freddie Mac guidelines, will consider canceling PMI based on your home’s current market value. And if that has gone up a lot since you bought your house, your equity may have grown faster than your payment record alone reflects, pushing you to the 80% threshold faster than you realize.

This is particularly helpful for folks paying PMI premiums right now, since home prices have climbed a lot since the 2020 pandemic.

(It’s worth noting that guaranteed loans from the Federal Housing Administration have mortgage insurance premiums that are not PMI, and these may be required for the life of the loan.)

So what?

If you’re paying for private mortgage insurance right now, you may not be stuck paying it for as long as you think. If your loan is in good standing and you can document a higher value through an appraisal or broker price opinion, ask your loan servicer whether it’s possible to cancel it and what’s required. PMI typically costs $30 to $70 per month for every $100,000 borrowed, according to Freddie Mac, so it could potentially put meaningful money back in your pocket.

Just remember: The law guarantees PMI removal based on the original value of your home, but lenders aren’t required to remove it based on current value, even if the math checks out. And if it’s allowed, you’ll have to pay for the appraisal or valuation.

And if you’re considering whether to buy a house, it’s worth exploring the tradeoffs of a smaller down payment — and understanding the ins and outs of PMI.

Smaller down payments add significantly to your interest costs over the life of the loan, but not having to come up with as much cash down can make it easier to afford a home, especially when you don’t already own something to trade up with. (About 65% of people with PMI were first-time buyers last year, according to the Mortgage Insurance Companies of America, and the typical down payment among first-time buyers was 9%.)

Related Reading

•  Breaking Down Private Mortgage Insurance (Freddie Mac)

•  Tackling Home Financing and Down Payment Misconceptions (National Association of Realtors)

•  Some First-Time Homebuyers Rely on the Bank of Mom and Dad (SoFi)

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn't recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

OTM20251027SW