How to Avoid Mortgage Insurance Without 20% Down

When a buyer provides less than 20% of the home’s purchase price for a conventional mortgage, lenders typically require Private Mortgage Insurance (PMI). PMI protects the lender from financial loss in the event a borrower defaults on the loan. While PMI can enable individuals to achieve homeownership with a lower upfront investment, it adds an expense to the monthly mortgage payment. This article explores methods and loan structures that can help homebuyers mitigate or eliminate mortgage insurance without a 20% down payment.

Loan Structures Designed to Bypass Mortgage Insurance

Homebuyers seeking to avoid a separate monthly mortgage insurance premium have options within conventional loan structures. One such strategy involves “piggyback” loans, which combine two mortgages to achieve a 20% equity position for the primary loan. A common example is an 80-10-10 structure, where the first mortgage covers 80% of the home’s value, a second mortgage covers 10%, and the buyer provides a 10% down payment. Other variations, like 80-15-5, also exist, requiring a 5% down payment and a 15% second mortgage.

This arrangement allows the larger first mortgage to bypass PMI because its loan-to-value (LTV) ratio is 80% or less. The second loan, which might be a Home Equity Line of Credit (HELOC) or a fixed-rate second mortgage, carries its own interest rate and payment schedule. While this structure avoids PMI, it introduces a separate loan with its own costs, which borrowers must consider.

Another alternative is Lender-Paid Mortgage Insurance (LPMI), where the lender covers the mortgage insurance premium. In exchange for the lender paying this cost, the borrower typically accepts a slightly higher interest rate on their main mortgage. This means there is no distinct monthly PMI payment, but the cost is embedded within the interest rate, leading to a higher overall monthly mortgage payment.

Unlike borrower-paid PMI, which can often be canceled later, LPMI generally remains for the life of the loan or until the mortgage is refinanced. Borrowers considering LPMI should analyze whether the higher interest rate over the loan’s term outweighs the benefit of not having a separate PMI payment.

Government-Backed Loans Without Mortgage Insurance

Certain government-backed loan programs offer distinct advantages by not requiring traditional monthly mortgage insurance, even with low or no down payment. VA loans, guaranteed by the U.S. Department of Veterans Affairs, are a notable example. These loans are available to eligible active-duty service members, veterans, and surviving spouses, typically requiring no down payment.

A significant benefit of VA loans is the absence of monthly mortgage insurance premiums. Instead, borrowers pay a one-time VA Funding Fee, which helps sustain the program for future generations of military personnel. This fee, usually between 0.5% and 3.3% of the loan amount, can be paid upfront at closing or financed into the loan.

USDA loans, backed by the U.S. Department of Agriculture, also present an opportunity to avoid monthly mortgage insurance. These loans are designed for properties in designated rural areas, and borrowers must meet specific income limitations based on the region. USDA loans often permit 100% financing.

While USDA loans do not have PMI, they include a guarantee fee comprising both an upfront and an annual fee. The upfront guarantee fee, typically 1% of the loan amount, can often be rolled into the loan balance. An annual fee, generally 0.35% of the loan balance, is also assessed and integrated into the monthly mortgage payment.

Strategies for Eliminating Mortgage Insurance Post-Purchase

For homeowners who initially obtained a mortgage with Private Mortgage Insurance, several strategies exist to eliminate this ongoing expense after the purchase. The Homeowners Protection Act of 1998 (HPA) provides a framework for automatic termination of PMI. Under this federal law, lenders are generally required to automatically cancel PMI once the loan’s principal balance reaches 78% of the home’s original value, based on the initial amortization schedule, provided payments are current.

Borrowers can also proactively request PMI cancellation earlier once their loan-to-value (LTV) ratio reaches 80% of the original property value. This borrower-initiated cancellation typically requires a good payment history without late payments. Lenders may also require a new appraisal, at the homeowner’s expense, to confirm the current property value, especially if cancellation is sought based on increased home appreciation.

Making additional principal payments on the mortgage loan can significantly accelerate the accumulation of equity. By reducing the outstanding loan balance more quickly, homeowners can reach the 80% or 78% LTV thresholds sooner.

Refinancing the mortgage offers another pathway to remove PMI. If the home’s value has increased substantially or if enough principal has been paid down, a homeowner can refinance into a new loan with an LTV of 80% or less. This new mortgage would not require PMI. Borrowers should consider the closing costs and new interest rate associated with refinancing to ensure it is financially advantageous.