How to Avoid Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is often required by lenders when borrowers make a down payment of less than 20% on a conventional mortgage. While PMI serves to protect lenders in case of borrower default, it adds an additional expense to homeownership. Here are some strategies to avoid paying PMI:

1. Make a 20% Down Payment

The most straightforward way to avoid PMI is to make a down payment of at least 20% of the home’s purchase price. By putting down 20% or more, you can avoid the need for PMI altogether.

2. Explore Lender-Paid Mortgage Insurance (LPMI)

With Lender-Paid Mortgage Insurance (LPMI), the lender pays the PMI premium on behalf of the borrower in exchange for a slightly higher interest rate on the loan. While LPMI may result in higher overall interest costs, it can be a viable option for borrowers who prefer to avoid upfront PMI payments.

3. Consider a Piggyback Loan

A piggyback loan, also known as an 80-10-10 or 80-15-5 loan, involves taking out a second mortgage to cover part of the down payment. By combining a first mortgage for 80% of the home’s value with a second mortgage for 10% or 15%, borrowers can avoid PMI while still making a lower down payment.

4. Wait Until You Have 20% Equity

If you’re unable to make a 20% down payment upfront, you can wait until you have built up 20% equity in your home through mortgage payments and appreciation. Once you reach 20% equity, you can request to cancel PMI from your lender.

5. Refinance Your Mortgage

If you’re already paying PMI, you may be able to refinance your mortgage once you have built up sufficient equity to remove PMI. Refinancing allows you to secure a new loan with a lower loan-to-value ratio, eliminating the need for PMI.

Conclusion

Private Mortgage Insurance (PMI) can add significant costs to homeownership, but there are several strategies to avoid or eliminate it. By making a 20% down payment, exploring Lender-Paid Mortgage Insurance (LPMI), considering piggyback loans, waiting until you have 20% equity, or refinancing your mortgage, you can save money on your mortgage payments and achieve your homeownership goals.