How Much Do I Have to Put Down to Avoid PMI?

Private Mortgage Insurance (PMI) is an insurance policy protecting the lender against loss if a borrower defaults on a conventional loan. It is generally required when a down payment is less than 20% of the home’s purchase price. This insurance helps borrowers qualify for a loan they might not otherwise obtain, though it increases the overall cost of the mortgage. This article explores how to navigate PMI, including strategies to avoid it and methods for its eventual cancellation.

Understanding Private Mortgage Insurance

PMI serves as a protection mechanism for mortgage lenders. When a borrower makes a down payment of less than 20% on a conventional loan, lenders require PMI to mitigate the increased risk associated with a higher loan-to-value (LTV) ratio. While PMI protects the lender, it does not offer direct protection to the borrower against foreclosure. However, it allows individuals to access homeownership sooner, even without a substantial down payment.

PMI costs typically range from 0.5% to 1.5% of the original loan amount annually. Factors influencing the cost include the borrower’s credit score, loan-to-value (LTV) ratio, and loan type. PMI is most commonly paid through monthly premiums added to the regular mortgage payment. Other options include a one-time upfront premium at closing, or a combination of both.

PMI applies to conventional loans, while mortgage insurance premiums (MIP) are associated with FHA loans. Both protect the lender, but their rules for requirement, cost, and cancellation differ. FHA loans include both an upfront premium and annual premiums, which often last for the life of the loan depending on its terms.

Meeting the Down Payment Threshold to Avoid PMI

To avoid PMI on a conventional loan, make a down payment of 20% or more of the home’s purchase price. This reduces the loan-to-value (LTV) ratio to 80% or less, signaling lower risk to the lender and eliminating PMI. For example, a 20% down payment on a $300,000 home is $60,000.

For example, a 20% down payment on a $400,000 home is $80,000. Achieving this 20% threshold can lead to lower monthly mortgage payments and less interest paid over the loan’s life.

A larger down payment also builds immediate home equity, providing a financial cushion. While 20% is the general benchmark for avoiding PMI, some lenders may allow slight variations. However, the 20% down payment remains the most direct method for circumventing PMI on a conventional mortgage.

Other Strategies to Avoid PMI

If a 20% down payment is not possible, several alternative strategies can help avoid PMI. One option is Lender-Paid PMI (LPMI), where the lender pays the premium in exchange for a slightly higher mortgage interest rate. While this eliminates a separate monthly PMI payment, the increased interest rate can result in higher overall costs over the loan’s lifetime compared to borrower-paid PMI.

Another strategy is a “piggyback loan,” often structured as an 80-10-10 or 80-15-5 loan. In an 80-10-10 scenario, the first mortgage covers 80% of the home’s value, a second loan (like a home equity loan or line of credit) covers 10%, and the borrower makes a 10% down payment. This setup avoids PMI on the primary mortgage by keeping its loan-to-value ratio at 80%.

Certain government-backed loans also do not require PMI. VA loans, guaranteed by the U.S. Department of Veterans Affairs, are available to eligible veterans, service members, and their spouses and do not require PMI, even with no down payment. These loans include a one-time VA funding fee, which can be paid upfront or rolled into the loan. Similarly, USDA loans, for eligible low-to-moderate income borrowers in designated rural areas, do not require PMI. Instead, USDA loans have an upfront guarantee fee and an annual fee, often lower than conventional PMI premiums.

Canceling Private Mortgage Insurance

Once PMI is in place, borrowers can pursue its cancellation under specific conditions. The Homeowners Protection Act (HPA) of 1998 provides legal frameworks for automatic termination and borrower-initiated cancellation of borrower-paid PMI. Lenders must automatically terminate PMI when the loan’s principal balance is scheduled to reach 78% of the property’s original value, provided the borrower is current on payments. This applies to mortgages closed on or after July 29, 1999.

Borrowers can also request PMI cancellation once their loan balance reaches 80% of the original property value. To do this, the borrower must submit a written request to their loan servicer and maintain a good payment history with no junior liens. The lender may require an appraisal to confirm the property’s value has not declined. If property appreciation or significant home improvements have increased equity, a new appraisal can demonstrate the 80% loan-to-value (LTV) threshold has been met sooner.

The rules for canceling FHA Mortgage Insurance Premium (MIP) differ from conventional PMI. FHA MIP cancellation depends on the loan’s origination date and original down payment. For some FHA loans, MIP may last for the life of the loan, requiring refinancing into a conventional loan to remove it. Understanding the specific type of mortgage insurance is essential for its removal.