Buying a home with less than a 20% down payment often means dealing with private mortgage insurance (PMI). This extra monthly fee is added to your mortgage payment and is attached to nearly half of all mortgages.
The cost of PMI depends on your credit score and finances and can range from 0.1% to 5% of the loan amount, potentially adding $10 to $500 or more to your monthly payments.
Thankfully, there are ways to reduce or bypass PMI altogether, even without having to fork over a big down payment.
What is PMI, and how much does it cost?
PMI example: $450,000 mortgage
|Principle and interest (6% rate)
PMI protects the lender (not the borrower) if you stop making payments on the mortgage.
The most common way to pay PMI is through a monthly premium added to your monthly mortgage payment, although sometimes lenders may charge a one-time premium at closing.
The cost of PMI varies based on factors including your credit score, down-payment size, loan amount, and the type of mortgage. A lower debt-to-income ratio and higher credit score will help reduce the amount of PMI you pay, according to David Naimey, a loan officer at Society Mortgage.
PMI can certainly make a mortgage unaffordable for some borrowers. For example, on a $500,000 home with a 10% down payment, PMI could add $375 monthly if the rate is 1%.
Can I get rid of PMI?
Eliminating PMI on a mortgage after you've closed on a home purchase is possible but requires the following actions:
- Paying down your mortgage to achieve 20% equity and then requesting the PMI's removal (which may require an appraisal to confirm your home's value).
- Reaching 22% equity through mortgage paydown, at which point lenders must cancel PMI as per the federal Homeowners Protection Act.
Unfortunately, starting with 10% equity and reaching 20% to 22% can take 5 to 10 years with standard payments and no significant property value change.
How to get a no-PMI mortgage
1. Research lenders with no- or low-PMI loans
Several loan programs and financial institutions offer mortgages without PMI, and some lenders help their clients navigate the complexities of PMI before securing a loan.
For example, Society Mortgage allows borrowers to pay a portion of the PMI upfront and then finance the rest into the borrower's monthly payment.
"This will reduce the monthly PMI if they get a conventional loan," says Jeremy Szozda, a loan officer at Society Mortgage.
Here's a rundown of some no- or low-PMI options.
No PMI mortgage loans
VA loans. No-PMI mortgage loans are available only for veterans, active military members, and spouses. VA loans also don't require a down payment, reducing out-of-pocket home buying costs.
USDA loans. These are ideal for homebuyers in rural areas. USDA loans often waive PMI. However, they require a guarantee fee that is essentially the same as mortgage insurance. USDA loans require the property to be located in an eligible location and might also require at least a “fair” credit rating (minimum FICO of 620) and income.
Low PMI mortgage loans
FHA loans. PMI is required on all FHA loans. However, in early 2023, the Biden administration announced the reduction of annual mortgage insurance premiums from 0.85% to 0.55% on FHA loans, estimated to save borrowers an average of $800 annually.
"If you put 5% down [on FHA loans], this fee reduces to 0.5%, and with 10% down it will automatically get removed in 11 years," says Naimey.
Bank loans with no PMI
Bank of America Affordable Loan Solution. This program offers a fixed-rate mortgage with as little as 3% down. While it requires mortgage insurance, the bank says its rates are typically lower than conventional loans. Be aware of income and loan limits that may apply.
Citi HomeRun Mortgage. Like Bank of America's offering, Citi's program requires a down payment of just 3%, but it comes with no PMI. It's available for purchases and refinancing and covers single-family homes, condos, co-ops, and 2-unit properties.
Credit unions and nonprofits
Navy Federal Credit Union. The Homebuyer Choice program provides 100% financing for purchases without PMI, catering to first-time homebuyers. Membership extends beyond veterans and active military, so you might qualify even if you don't have a military background.
NASA Credit Union. Offering a $0 down, no-PMI mortgage for first-time buyers, NASA Credit Union opens its doors to non-NASA employees through membership in the National Space Society. The lender even offers a complimentary first-year membership.
The Neighborhood Assistance Corporation of America (NACA) has a unique mortgage program that requires no down payment, no closing costs, and no PMI. However, it does require some commitment: You'll need to attend a homebuyer workshop, become a NACA member, and work with a counselor to access this mortgage product.
Get a piggyback mortgage on a conventional loan
Piggyback loan: $500,000 house example
A piggyback loan, often referred to as an 80/10/10 loan or combination loan, is a savvy strategy for homebuyers looking to avoid PMI without putting 20% down.
This approach is particularly beneficial for those with strong credit and a stable income, as it involves managing two separate loans. Here's what you need to consider.
How a piggyback mortgage works
You start by making a 10% down payment. Then, instead of covering the remaining 90% with a single mortgage, you split it further: You take a second mortgage for another 10% and a primary mortgage for the remaining 80%.
Here's an example: You're buying a house priced at $500,000. You would make a down payment of $50,000 (10%), secure a second mortgage for an additional $50,000 (10%), and then cover the remaining $400,000 (80%) with your primary mortgage.
This strategy allows you to bypass PMI, as you're effectively meeting the 20% threshold, but it does mean you'll be managing and making monthly payments on two separate loans.
Consider a lender-paid mortgage insurance (LPMI) loan
An LPMI loan presents an alternative route for homebuyers looking to avoid PMI. There's no PMI, though you'll pay a higher interest rate on the mortgage.
While this arrangement frees you from making separate PMI payments, it could lead to higher total costs over the lifespan of your loan, particularly if you don't plan to refinance or sell soon.
Consider the long-term financial implications of an LPMI loan before proceeding. Weigh the immediate benefit of avoiding PMI against the potential for increased costs over time due to the higher interest rate. This calculation often depends on how long you intend to stay in the home.
LPMI loans may work best for:
Short-term homeowners. If you intend to live in your home for only a few years, an LPMI loan could be a practical choice. The higher interest rate may have less impact over a shorter period, making it a workable option for those who plan to sell soon.
Refinancers. For homebuyers planning to refinance their mortgage shortly after purchasing the home, an LPMI loan can be an option. Since you'll likely pay the higher interest rate for a short time before refinancing, it could be a cost-effective strategy.
But this option is also risky because it relies on the assumption that mortgage rates will fall in the future, which is not guaranteed. Contact a mortgage lender for more specific advice.
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This article was reviewed by David Naimey, a loan officer at Society Mortgage.