With rental costs rising across America, home ownership is becoming more appealing. Whether you rent or make mortgage payments, you’ll have a monthly housing expense either way—why wouldn’t you want to put that money towards something you own instead of someone else?
Of course, the first hurdle in buying a home is the down payment. Most loan programs will require a minimum down payment of 20 percent of the loan or a monthly PMI payment.
What Is PMI?
PMI (Private Mortgage Insurance) is insurance coverage that protects the lender if a borrower defaults on a home loan. PMI requires a monthly payment on top of your mortgage payment, making it larger than it would have otherwise been.
PMI isn’t necessarily bad; it allows you to afford a home much sooner than you would have been able to with a 20 percent down payment. However, PMI adds to your monthly mortgage payment, leading many homeowners to wonder how to avoid it.
How Much Does PMI Cost?
PMI rates vary by credit score and other factors, but they typically range from 0.58 percent to 1.86 percent of the original loan amount.
For example, a $230,000 loan with $15,000 down and a credit score of 680 to 699 might have a PMI of around 1.21 percent, or $217 a month, on top of the standard mortgage payment.
How to Avoid PMI Without Paying 20% Down
Avoiding PMI without paying 20 percent down can make a significant difference in the overall lifetime cost of a mortgage loan and the size of your monthly payments. There are a few ways a borrower can avoid PMI without making a large down payment.
Find Lender-Paid Mortgage Insurance (LPMI)
Lenders will sometimes advertise “No PMI home loans.” In these cases, the lender will pay for the PMI themselves but charge a higher interest rate on the mortgage to cover their expense. While homeowners still must fork over the cost of a higher interest rate with LPMI, your mortgage payment each month might be cheaper than if you paid a monthly insurance premium.
It’s best to carefully compare the costs and benefits of a no-PMI mortgage program. While it is sometimes cheaper than paying the PMI, sometimes it isn’t, depending on the loan terms.
Get a Piggyback Mortgage
A piggyback mortgage lets you buy a home with two loans. The first loan covers 80 percent of the home price, the second loan covers 10 to 15 percent, and your down payment covers the remaining amount.
Piggyback loans can be harder to find nowadays. If you can secure a second mortgage, this loan typically has a higher interest rate than the first mortgage.
Alternatively, you can still avoid PMI if you fulfill the 20 percent down payment with a loan from another source, such as a family member. Remember, however, that your pre-approval for a home loan often depends on not taking out new loans or credit cards.
See If You Qualify for a VA Loan
Did you or your spouse serve in the military? VA loans are loans backed by the Department of Veteran Affairs. They are for active or veteran service members and their spouses.
Because these loans are backed, they do not require mortgage insurance, though there is a one-time funding fee. VA loans are a great way to get a home without PMI or paying 20 percent down.
Secure a Loan that Doesn’t Require PMI
Occasionally lenders and banks create special programs that allow a low down payment with no PMI. There are sometimes additional perks for first-time home buyers, low-income home buyers, and certain professionals like teachers or doctors.
How to Get Rid of PMI on a House I’ve Already Purchased
PMI is no longer required once a mortgage’s loan-to-value, or LTV (loan divided by value), has reached 80 percent. This can happen in one of two ways; a homeowner pays down the loan so that the loan’s value is 80 percent of what the home is worth, or the home appreciates, becoming greater in value than the loan amount.
Once the home loan’s LTV value reaches 80 percent, PMI is usually no longer required and can be requested to be removed from the monthly mortgage payment. Once a mortgage drops to 78 percent, the federal Homeowners Protection Act requires the lender to cancel PMI automatically.
Get Your New Home With First Fidelis
First Fidelis wants to help you reach your goal of being a homeowner. Our wide range of loan programs allows us to find the right mortgage for you. Our speedy loan process can help you close your new loan within 30 days! Fill out our pre-approval application to get started, or contact us to learn more.
FAQs
Use a piggyback loan with 10% down and no PMI
The buyer then takes out a second mortgage loan, which provides another 10% of the home's purchase price. So they effectively have a 20% down payment and do not have to pay mortgage insurance. The most common piggyback loan arrangement looks like this: An 80% first mortgage.
How to get out of PMI without 20% down? ›
Use a piggyback loan with 10% down and no PMI
The buyer then takes out a second mortgage loan, which provides another 10% of the home's purchase price. So they effectively have a 20% down payment and do not have to pay mortgage insurance. The most common piggyback loan arrangement looks like this: An 80% first mortgage.
Do you have to put 20 down to avoid PMI? ›
Your down payment amount: A down payment of 20 percent or more results in no PMI. Below that cut-off, there can be a significant difference in the amount you'll pay every month, depending on how much money you put down.
Is there any way to avoid PMI? ›
One way to avoid paying PMI is to make a down payment that is equal to at least one-fifth of the purchase price of the home; in mortgage-speak, that means the mortgage's loan-to-value (LTV) ratio is 80%. If your new home costs $180,000, for example, you would need to put down at least $36,000 to avoid paying PMI.
How can PMI be waived? ›
You can typically remove PMI if market conditions lead to a significant increase in your home's value. You have to make a request with your lender and order a new appraisal. The appraisal confirms your property value rose enough to where you own the required amount of equity.
How do you knock off PMI? ›
A borrower can request PMI be canceled when they've amassed 20 percent equity in the home and lived in it for several years. There are other ways to get rid of PMI ahead of schedule: refinancing, getting the home re-appraised (to see if it's increased in value), and paying down your principal faster.
Can PMI be negotiated? ›
Fixed premiums: You may be able to negotiate PMI with your lender. However, the FHA sets the UFMIP and annual MIP rates, and you can't negotiate them.
How do I get my PMI removed? ›
To request cancellation of PMI, you should contact your loan servicer when the loan balance falls below 80 percent of your home's original value (the contract sales price or the appraised value of your home at the time it was purchased).
Can you refuse PMI? ›
You can remove PMI, or private mortgage insurance, from your mortgage after you have established enough equity in your home. You will need at least 20% in equity. At that point, you can request to have it removed or wait for it to automatically drop off when you have 22% in equity.
Why is my PMI so high? ›
The larger your loan, the more PMI you will end up paying. The cost of PMI is also influenced by your loan-to-value ratio (LTV). This represents how much you're borrowing in comparison to the total value of the property. The more you put down, the less you need to borrow, which gives you a higher LTV.
In other words, if you put down less than 20 percent, it will add a bit more to your monthly payments in the form of PMI. The exact amount depends on how much you did put down and what your interest rate is. Fortunately, PMI will not usually extend for the entire life of a conventional loan.
Is paying PMI worth it? ›
PMI has helped increase home affordability for many Americans over the years. It is intended as a helpful tool for homebuyers who do not have the required 20% down payment of the home's value. It works by insuring the loan for mortgage lenders in case the homeowner defaults on the loan.
What is the PMI cancellation act? ›
The Act, also known as the “PMI Cancellation Act,” addresses homeowners' difficulties in canceling private mortgage insurance (PMI)1 coverage. It establishes provisions for canceling and terminat- ing PMI, establishes disclosure and notification requirements, and requires the return of unearned premiums.
How to get out of PMI without 20 down? ›
When it comes to PMI, if you have less than 20% of the sales price or value of a home to use as a down payment, you have two basic options: Use a stand-alone first mortgage and pay PMI until the LTV of the mortgage reaches 78%, at which point the PMI can be eliminated. 2. Use a second mortgage.
Can I get my home appraised to remove PMI? ›
If you've paid the principal balance below 80% of the home's original value, PMI can typically be removed. This process involves getting a new appraisal to determine the home's current value and ensuring it meets the lender's requirements under the Homeowners Protection Act.
How to write a letter to remove PMI? ›
Dear Sirs: I am writing to request the cancellation of the Private Mortgage Insurance (PMI) policy attached to my mortgage. As you are aware, Federal law allows for the cancellation of PMI when certain LTV ratios are met through the normal amortization of a mortgage, or amortization coupled with market appreciation.
Do I have to wait 2 years to remove PMI? ›
Get an Appraisal
Many lenders (like Fannie Mae) also require a two-year “seasoning requirement,” meaning you can't have PMI removed until you've made two years' worth of on-time payments—even if your equity has grown above 20%. If it's been less than five years, you might even be required to have 25% worth of equity.
Does PMI go away if home value increases? ›
PMI is automatically removed when your loan-to-value (LTV) ratio reaches 78%. You can request to have PMI removed from your loan when you reach 80% LTV in your home. You can achieve an 80% LTV ahead of schedule if your home's value increases or if you make extra loan payments.
How do I ask for PMI to be removed? ›
To request cancellation of PMI, you should contact your loan servicer when the loan balance falls below 80 percent of your home's original value (the contract sales price or the appraised value of your home at the time it was purchased).
Can PMI be removed from loan? ›
Yes. You have the right to ask your servicer to cancel PMI on the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.
