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If you don’t have a 20% down payment on a home, that’s OK. Most buyers don’t. But if you’re in that league and acquire a conventional mortgage, the lender will want extra assurance — insurance, actually — that you’ll pay the loan back. Private mortgage insurance (PMI) is usually the price to pay until you reach 20% equity or, as lenders say, 80% loan-to-value.

In an effort to help low- and middle-income borrowers, the Biden-Harris Administration reduced monthly mortgage insurance premiums for new FHA loans — that is, loans backed by the Federal Housing Administration. However, those cuts do not affect homebuyers with conventional loans and PMI.

Can you avoid PMI? It’s tough. Below, we’ll take a closer look at PMI, strategies to avoid it, and how to know when you can get rid of it.

What Is PMI?

Private mortgage insurance is charged by lenders of conventional home mortgage loans, which are loans not insured by a government agency. FHA, VA (Veterans Administration), and USDA (U.S. Department of Agriculture) loans are government-insured loans.

The 30-year conventional home loan is the most common mortgage, and 20% down is ideal. But…

You’ve seen home prices lately. Twenty percent down on a $250,000 or $400,000 or $750,000 home is just not doable for everyone. In 2024, the median down payment for buyers was 18%, but for first-time homebuyers, it was nine percent, according to the National Association of Realtors.®

PMI is meant to protect the lender from risk. The premiums help the lender recoup its losses if a borrower can’t make the mortgage payments and goes into default.

How Much Does PMI Cost?

PMI is often 0.5% to 1.5% of the total loan amount per year, but can range up to 2.25%.

The cost of PMI depends on the type of mortgage you get, how much your down payment is, your credit score, the type of property, the loan term, and the level of PMI coverage required by your lender.

If you’re shopping for a mortgage and you apply for one or more, the premium will be shown on your loan estimate. If you go forward with a home loan, the premium will be shown on the closing disclosure.

How to Pay PMI

Most borrowers pay PMI monthly as a premium added to the mortgage payment.

Another option is to pay PMI with a one-time upfront premium at closing.

Yet another is to pay a portion of PMI up front and the remainder monthly.

How to Avoid PMI Without 20% Down

One way to avoid PMI is to make use of a piggyback mortgage. Another is to seek out lender-paid mortgage insurance.

Piggyback Loan

With a piggyback loan, typically an 80/10/10 mortgage, you’d take out two loans at the same time, a first mortgage for 80% of the home price and a second mortgage for 10% of the home value, and put 10% down. Note: SoFi does not offer piggyback loans. SoFi does offer fixed-rate and adjustable-rate first mortgages, as well as VA and FHA loans.

The 80% loan is usually a 30-year fixed-rate mortgage, and the 10% loan is typically a home equity line of credit that “piggybacks” on the first mortgage.

A 75/15/10 piggyback loan is more commonly used for a condo purchase because mortgage rates for condos are higher when the loan-to-value ratio (LTV) exceeds 75%.

Both loans do not have to come from the same lender. Borrowers can tell their primary mortgage lender that they plan to use a piggyback loan and be referred to a second lender for the additional financing.

Because you’d be taking out two loans, your debt-to-income ratio (monthly debts / gross monthly income x 100) will fall under more scrutiny. Mortgage lenders typically want to see a DTI ratio of no more than 36%, but that is not necessarily the maximum.

Piggybackers will need to be prepared to make two mortgage payments. They will want to examine whether that secondary loan payment will be higher than PMI would be.

Lender-Paid Mortgage Insurance

In most cases with lender-paid mortgage insurance (LPMI), the lender pays the PMI on your behalf but bumps up your mortgage interest rate slightly. A 0.25% rate increase is common.

Monthly payments could be more affordable because the cost of the PMI is spread out over the whole loan term rather than bunched into the first several years. But the loan rate will never change unless you refinance.

Borrowers will want to look at how long they expect to hold the mortgage when comparing PMI and LPMI. If you need a short-term mortgage, plan to refinance in a few years, or want the lowest monthly payment possible, LPMI could be the way to go. Note: SoFi does not offer LPMI.

When PMI Is No Longer Required

Borrowers generally need to have 20% equity in their home to drop PMI.

The Homeowners Protection Act was put in place to protect consumers from paying more PMI than they are required to. Specifically for single-family principal mortgages closed on or after July 29, 1999, the law covers two scenarios: borrower-requested PMI termination and automatic PMI termination.

Once you’ve built 20% equity in your home, meaning you’re at an 80% LTV based on the home’s original value (the sales price or the original appraised value, whichever is lower), you can ask your mortgage loan servicer — in writing — to cancel your PMI if you’re current on all payments. Your monthly mortgage statement shows your loan servicer information.

The very date of this occurrence, barring no extra payments, should have been given to you in a PMI disclosure form when you received your mortgage. It’s based on your loan’s amortization schedule.

As long as you’re current on all payments, PMI will automatically terminate on the date when your principal mortgage balance reaches 78% of the original value of your home.

If that LTV ratio is not reached by the midpoint of the mortgage amortization period, PMI must end the month after that midpoint.

PMI vs. MIP vs. Funding Fees

The upside of PMI is that it unlocks the door to homeownership for many who otherwise would still be renting. The downside is, it adds up.

If you’re tempted to go with an FHA mortgage, realize that this type of loan requires up front and annual mortgage insurance premiums (MIP) that go on for the life of the loan if the down payment was less than 10%.

Mortgages insured by the Department of Veterans Affairs come with a sizable funding fee, with a few exceptions, and loans backed by the Department of Agriculture come with up front and annual guarantee fees.

Ways to Boost a Down Payment

A bigger down payment not only may allow a borrower to avoid PMI but usually will afford a better loan rate and provide more equity from the get-go, which translates to less total loan interest paid.

So how to afford a down payment? You could shake down Dad or Granny (just kidding; Grandma responds better to sweet talk than coercion). For a conventional loan, gift funds from a relative or from a domestic partner or fiance count toward a down payment. There’s no limit to the gift, but you may be expected to come up with part of the down payment. You’ll also need to present a formal gift letter to validate the funds given to you.

A gift of equity is a wonderful thing indeed. When a seller gives a portion of the home’s equity to the buyer, it is shown as a credit in the transaction and may be used to fund the down payment on principal or second homes.

You could look into down payment assistance from state, county, and city governments and nonprofit organizations, which usually cater to first-time homebuyers. And home listings on Zillow now include information about down payment assistance programs that might be available to buyers searching for homes on the platform.

Even if you can’t come up with 20%, it’s all good because PMI doesn’t last forever, and real estate is one of the key ways to build generational wealth.

The Takeaway

What is PMI? Private mortgage insurance typically goes along for the ride when a borrower puts less than 20% down on a conventional mortgage. A gift or other down payment assistance can fatten the down payment and help you avoid PMI. If you do end up paying, you can step away from PMI once your equity reaches 20%.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is it better to put down 20% or pay PMI?

It would be great to make a down payment of 20% and avoid private mortgage insurance (PMI) but not everyone can afford it. It’s particularly hard for first-time homebuyers, who often don’t have income from the sale of another residence to fund their next home. Use a home affordability calculator to look carefully at monthly mortgage payment amounts for different home prices and interest rates. Then put down what you feel you can afford without compromising your ability to cover other bills.

How long do I have to pay PMI?

If you are paying private mortgage insurance, you’ll need to pay until you have built up 20% equity in your home (based on the original sale price of the home). At this point, you can request in writing that your loan servicer cancel PMI if you are current on your payments.

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SOHL-Q125-041

Health Savings Accounts (HSA) are tax-advantaged accounts that help you pay for out-of-pocket healthcare expenses. Medicare is government-funded health insurance for those aged 65 and older.

While it’s possible to have an HSA and Medicare at the same time, there are some important rules to be aware of to avoid penalties when you have both. Here’s how Medicare affects an HSA.

Understanding Health Savings Accounts (HSAs)

Health Savings Accounts are tax-advantaged accounts that can be used with high-deductible health plans (HDHP).1 HDHPs are plans that, by law, must set a minimum deductible amount and a maximum out-of-pocket limit for coverage.

In 2024, a plan is considered an HDHP by the IRS when it has a minimum deductible of $1,600 for an individual and $3,200 for a family, and doesn’t exceed $8,050 for an individual and $16,100 for a family. In 2025, a plan qualifies as an HDHP when it has a minimum deductible of $1,650 for an individual and $3,300 for a family, and does not exceed $8,300 for an individual and $16,600 for a family.

When you have an HDHP, you have the option to use an HSA as a way to contribute pre-tax dollars to help cover the higher out-of-pocket upfront costs of these plans. It’s also important to note that HSAs offer investment options such as stocks, bonds, and mutual funds, as well as the possibility for tax-free growth.

If you’re wondering how to set up a health savings account, just remember that being enrolled in an HDHP, either through your employer or self-employed health insurance coverage, is a requirement.

The benefits of an HSA include:

•   Contributions are tax-deductible

•   You and your employer can both contribute, up to annual limits

•   Contributions grow tax-deferred

•   Funds roll over year to year, which is a major difference between an HSA vs. FSA

•   Withdrawals are tax-free when you use them for qualified medical expenses

The IRS sets the annual contribution limits for HSAs. Limits are determined by your coverage type. Here’s how much you could contribute for 2024 and 2025.

Annual contribution limits apply to employer and employee contributions. So if you have family coverage and your employer contributes $3,000 to your account for 2024, the most you could contribute is $5,300.

If you’re 55 or older, you can contribute an extra $1,000 a year to your HSA until you enroll in Medicare.

Recommended: What Is a Flexible Spending Account?

HSA Contributions and Medicare Enrollment

Using an HSA for retirement can make sense if you’d like to minimize your out-of-pocket costs for healthcare. But it’s important to properly coordinate your Health Savings Account and Medicare enrollment.

Here’s how the HSA Medicare rules work as you’re looking to manage your healthcare costs in retirement.

How Medicare Affects HSA Eligibility

You can have an HSA with Medicare, but there are some rules. If you enroll in Medicare the month you turn 65, you’ll need to stop contributing to your HSA at the beginning of the month before your 65th birthday month. If you delay enrolling in Medicare until after age 65, a six-month look-back period stipulates that you must stop contributing to your HSA six months before you enroll in Medicare or begin receiving Social Security benefits. Also, you cannot set up a new HSA after enrolling in Medicare.

The reason for these rules? One of the conditions of contributing to an HSA is that you can’t have any other health insurance besides a high-deductible health plan. Thus, since Medicare is health insurance, enrollment automatically disqualifies you from making new HSA contributions.

You can still make withdrawals from your HSA, but according to the HSA rules with Medicare, if you (or your employer) make new contributions to your HSA after Medicare enrollment, the IRS will treat them as excess contributions. Excess contributions are subject to a 6% excise tax penalty, which applies each year those contributions remain in your account.

Managing Your HSA When Transitioning to Medicare

The most important thing to consider with HSA contributions and Medicare is knowing when you need to halt them. If your employer makes contributions to your account for you, you’ll also need to tell them when to discontinue the contributions.

As mentioned previously, if you enroll in Medicare the month you turn 65, you and your employer will need to stop contributing to your HSA at the beginning of the month before your 65th birthday month. That means if your birthday is in July, you should stop contributing at the beginning of June.

If you delay enrolling in Medicare until after age 65, you must stop contributing to your HSA six months before you enroll in Medicare. So, let’s say you plan to enroll in the month you turn 65 and your birthday is September 15th. You would make contributions to your HSA no later than March 15th to avoid a tax penalty.

Recommended: Can You Retire at 62?

Using HSA Funds in Retirement

Like many people, you’re probably wondering how much do you need to retire. Healthcare can be a significant retirement expense, so factoring your HSA into the equation can be helpful.

The more money you have in an HSA, the less you may need to draw from your 401(k), traditional IRA, Social Security benefits, or other assets to pay for medical expenses.

Here are some tips for making the most of HSA funds once you retire.

•   Pay for qualified medical expenses first. The IRS defines what counts as a qualified medical or dental expense in Publication 502. It helps to know what counts and what doesn’t to make sure you’re withdrawing funds tax-free whenever possible.

•   Time non-medical withdrawals carefully. Withdrawing money for anything other than healthcare expenses before age 65 can trigger a 20% tax penalty and you’ll owe income tax on the withdrawal. Once you reach 65, the 20% tax penalty goes away so it’s important to consider the timing if you need to use HSA funds for non-medical expenses.

•   Keep good records. It’s important to keep track of healthcare expenses to get the most mileage out of your HSA. For example, medical billing errors could end up charging you more than you actually need to pay, so it’s wise to review estimates and medical bills carefully before you make a payment.

HSAs vs. Medicare Savings Accounts

A Medicare Savings Account or Medical Savings Account (MSA) is somewhat similar to a Health Savings Account that Medicare enrollees can open. More specifically, an MSA is a special type of savings account you can access through a Medicare Advantage Plan, also known as Medicare Part C.

These accounts combine a high-deductible health plan with a medical savings account. Medicare gives your HDHP a set amount each year for your healthcare expenses, which goes into your MSA. You don’t contribute to your MSA directly; Medicare makes contributions for you. It’s up to you to decide which Medicare-eligible costs you want to use the money to pay for. You can access funds through a checking account, debit card, or credit card, depending on how your MSA is set up.

Recommended: Guide to Health Insurance

Maximizing HSA Benefits Before Medicare

The best way to maximize HSA benefits before enrolling in Medicare is to contribute as much as you can to your account annually, starting in the first year you’re eligible to contribute. The longer you have to invest your HSA funds, the more time your HSA investments may have to grow through the power of compounding returns.

Once you turn 55, remember that you can make an additional $1,000 catch-up contribution each year. That’s an extra $10,000 you could contribute to your plan until you hit your Medicare enrollment window at age 65.

You can also make the most of your benefits by choosing investments in your HSA that offer a combination of solid returns and low fees. If you have multiple HSA accounts with previous employers you may consider consolidating HSAs before enrolling in Medicare so your savings is easier to manage.

Common Mistakes to Avoid

The biggest mistake to avoid with HSAs and Medicare is continuing to contribute after Medicare enrollment. Doing so could trigger a sizable IRS tax penalty, not to mention that correcting excess HSA contributions can be a hassle.

The next biggest mistake is not contributing to your HSA at all in the years leading up to Medicare enrollment. When you don’t contribute anything to your HSA, you miss out on some key tax benefits both now and down the line.

Even if you’re young and healthy now and Medicare enrollment is decades away, you can still benefit from tax-deductible contributions to your HSA. And when you need the money, you’ll appreciate being able to withdraw it tax-free for qualified medical expenses.

The Takeaway

An HSA is a way to help pay for out-of-pocket medical costs and also save and invest money for healthcare needs in retirement. Just be sure to know the rules regarding HSAs and Medicare to maximize your HSA and avoid any penalties.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can I contribute to an HSA after enrolling in Medicare?

Once you enroll in Medicare you cannot make new contributions to an existing HSA or set up a new HSA account. If you continue to make HSA contributions after enrolling in Medicare, the IRS can impose a tax penalty until you remove the contributions from your account.

How can I use my HSA funds after enrolling in Medicare?

Once you enroll in Medicare, you can use your HSA funds to pay for qualified medical expenses and those withdrawals are tax-free. Starting at age 65, you can withdraw HSA funds for any reason without a penalty. You’ll just pay income tax on the withdrawals.

What happens to my HSA if I delay enrolling in Medicare?

Delaying Medicare enrollment doesn’t affect your HSA, though you will still need to stop making HSA contributions at least six months before you enroll. However, it’s important to note that late enrollment in Medicare could trigger penalties, so be sure to research and consider all the possible implications before choosing to delay.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.