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, if you will — that you’ll pay the loan back.Private mortgage insurance 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 recently reduced monthly mortgage insurance premiums for new FHA loans. Those cuts will not affect homebuyers with conventional loans and private mortgage insurance (PMI).
Can you avoid PMI? Other than coughing up 20% down, you could seek a piggyback mortgage or lender-paid mortgage insurance.
What Is PMI?
Private mortgage insurance is charged by lenders of conventional mortgages, which are loans not insured by a government agency. FHA, VA, and USDA loans are.
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 many, or most. The average down payment for all buyers has been about 13%, 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.
Estimate PMI Costs
Use this calculator to estimate PMI based on how much home you can afford.
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.
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 think about 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.
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.
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 a mortgage backed by the Federal Housing Administration, realize that an FHA 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.
| Type of Loan | Upfront Fee | Annual Fee |
|---|---|---|
| Conventional | n/a | 0.5% to 1.5%+ |
| FHA | 1.75% | 0.15% to .75% |
| VA | 1.4% to 3.6% | n/a |
| USDA | 1% | 0.35% |
Recommended: PMI vs. MIP
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, which typically goes along for the ride when a borrower puts less than 20% down on a conventional mortgage. How to avoid PMI? Hunt for lender-paid mortgage insurance or a piggyback loan, or seek gifts or other assistance to fatten the down payment.
SoFi offers fixed-rate conventional mortgages at competitive rates. Qualifying first-time homebuyers can put just 3% down, and others can put 5% down.
Look into all the advantages of getting a home mortgage loan with SoFi.
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