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How to avoid PMI without 20% down

How to avoid PMI without 20% down

By: Craig Berry

February 25, 2022 – 

Avoid PMI without a 20% down payment

The great thing about PMI is that it helps you buy a house with less than 20% down. But on the downside, it’s an additional fee you have to pay each month.

Because of this, some home buyers want to avoid PMI at all costs.

Fortunately, it’s possible to put less than 20% down without adding PMI premiums to your monthly mortgage payment. Here’s how.

Check your no-PMI options. Start here (Apr 8th, 2023)

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>Related: How to buy a house with $0 down: First-time home buyer

How to avoid PMI: Three strategies

Buyers who want to avoid PMI premiums while still putting less than 20% down have three potential strategies:

  1. Make the lender pay: Buyers can look for a lender offering lender-paid mortgage insurance (LPMI), which eliminates PMI in exchange for a higher interest rate
  2. PIggyback mortgage: With a piggyback mortgage, the buyer gets a second loan to cover part of the down payment. The second loan helps reach the 20% threshold needed to avoid PMI on a conventional mortgage
  3. Loans that don’t require PMI: Buyers can also avoid PMI by looking for a type of loan program that doesn’t require PMI in the first place

In this article, we’ll explore these strategies so you can decide which one best meets your needs.

  1. Get the lender to pay for your mortgage insurance

Lender-Paid Mortgage Insurance (LPMI) is exactly what it sounds like: The mortgage lender covers your mortgage insurance so you don’t have to pay out of pocket. This is one way to avoid PMI.

Of course, there’s a catch.

If the lender pays your mortgage insurance, you’ll pay a higher interest rate in return.. In reality, you’re still paying for PMI — but it’s in the form of your interest payment instead of monthly premiums.

You can get a Lender Paid Mortgage Insurance loan with as little as 3% down. However, the rate will be fairly high on that loan, especially if you don’t have an awesome credit score.

Following is an example showing the monthly cost of LPMI versus traditional PMI with a 720 credit score.

Down Payment Rate with PMI* Mortgage Payment With Regular PMI Rate with LPMI* Mortgage Payment With LPMI
3% Down 3.25% $1,320 3.875% $1,140
5% Down 3.125% $1,150 3.75% $1,100
10% Down 3.125% $1,060 3.75% $1,040

*Rates shown are for sample purposes only. Your own rate will be different. Payments assume a $250,000 home price in WA with a 30-year fixed-rate mortgage. 

In this case, the LPMI does save you a bit of money each month.

However, you can never cancel LPMI, even if you pay your mortgage down below 80% of your home value. Traditional PMI goes away when your loan balance hits 78% of the home’s value. But your LPMI rate will not drop at that point.

Instead, you’d keep paying the higher LPMI rate for the life of the loan (or until you refinance).

Consider how long you will be in the home, whether you will eventually keep it as a rental, or other long-term plans before accepting LPMI.

Check your no-PMI options. Start here (Apr 8th, 2023)

  1. Use a “piggyback loan” with 10% down and no PMI

Another way to avoid PMI is by using a piggyback mortgage.

This is a unique loan structure where the buyer needs only 10% down in cash.

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
  • A 10% second mortgage (usually a home equity line of credit)
  • A 10% down payment

This structure is often called an “80/10/10.”

For buyers of condominiums, 75/15/10 piggyback loans are more common, mainly because mortgage rates are higher for condos with less than 25% down.

The second mortgage is often from the same bank or lender as the first mortgage.

But you might have to find your own second mortgage if your lender does not offer them. A credit union or local bank is a great source for these loans.

Just make sure the second lender knows you are purchasing a home and you need the financing completed on a specific day. Let them know your closing date and make sure they can accommodate a quick closing if necessary.

Piggyback loans are a little-known type of mortgage that can be a great way to avoid PMI on conventional loans with less than 20% down.

  1. Find a no-PMI mortgage program

From time to time, lenders and banks create their own programs that allow a low down payment with no PMI.

These may even have additional perks for first-time home buyers, lower-income home buyers, or certain professionals (like teachers and doctors).

Here are just a few examples of no-PMI mortgage programs:

  • Neighborhood Assistance Corporation of America (NACA) —This organization focuses on providing homeownership opportunities to low-to-moderate income individuals or those buying in underserved communities. NACA touts no down payment, no closing costs, no points, below-market rates, and best of all, no PMI. Keep in mind that this loan is only for those who fit their criteria, and it’s unclear how many qualify for the loan
  • Bank of America — At the time of this writing, Bank of America offers the Affordable Loan Solution mortgage. It requires just 3% down and does not require PMI. Pre-homeownership counseling is required through B of A’s network of counselors, and maximum income limits apply
  • CitiMortgage —This nationwide lender offers the HomeRun Mortgage which offers loans up to $726,200 (higher in high-cost areas) with 3% down and no PMI. Homeownership education is required, but these courses typically require a small time commitment
  • Movement Mortgage — This all-digital lender offers the “Dream to Own” mortgage, a conventional loan program with no mortgage insurance required. It also allows down payment and closing cost assistance up to 4% of the home price. A minimum credit score of 660 is required to qualify
  • Caliber Home Loans — If you’re buying a high-priced home, Caliber’s “Elite Access” program offers jumbo loans with just 5% down and no mortgage insurance. Currently, a jumbo loan is anything over $726,200 in most areas. Borrowers need at least a 740 FICO score to qualify, and 9 months’ worth of mortgage payments in ‘cash reserves’ (savings)

The tradeoff here is that no-PMI loans usually have higher rates. And, they often require a higher credit score to qualify.

Keep in mind that lenders can change proprietary mortgage programs at any time.

These programs are current at the time of writing, but double-check with the lender to see what’s available before applying.

Check your no-PMI options. Start here (Apr 8th, 2023)

VA loans and PMI

For eligible veterans, active duty service members, and other armed forces personnel, a VA loan is usually the best way to avoid PMI.

VA home loans are available with 0% down and do not require any monthly mortgage insurance payments. There’s only a one-time Funding Fee borrowers must pay upfront to use a VA loan.

Depending on your down payment and whether you’ve used a VA loan before, the Funding Fee is between 1.4% and 3.6% of the loan amount. But the total cost will likely be cheaper than what others pay for monthly mortgage insurance.

The lack of PMI, coupled with exceptionally low rates, is what makes a VA loan such a great deal for qualified veterans.

Check your VA loan eligibility. Start here (Apr 8th, 2023)

How much does PMI cost?

In general, PMI costs range from 0.30% to 1.15% of your loan balance annually. This amount will be broken into 12 installments and paid along with your monthly mortgage payment.

Your PMI rate is based on your credit score, your loan-to-value ratio (which is determined by your down payment), and your loan term.

Here’s an example:

  • Home price: $250,000
  • Credit score: 740 (excellent)
  • Down payment: 5% ($12,500)
  • Loan: $237,500 30-year fixed rate mortgage
  • Annual PMI: $1,236
  • Monthly PMI cost: $103

Because PMI is calculated based on your loan amount, your total PMI cost will go down each year as you pay off your loan balance.

How PMI is calculated

Like all insurance policies, the cost of PMI is risk-based. Making a smaller down payment or getting an adjustable-rate mortgage, for example, puts your lender at greater risk, so you should expect your PMI costs to run higher.

When you can make a 20% down payment (80% loan-to-value ratio), you lower the lender’s risk to the point that you won’t need to pay PMI at all.

However, PMI premiums change regularly. From state to state and lender to lender, PMI costs will vary.

And while PMI may be your only option when purchasing a new home, not buying a home may be an even less fruitful investment when you consider that real estate grows in value, historically.

Conventional PMI versus FHA MIP

It is important to note the difference between PMI (private mortgage insurance) and MIP (mortgage insurance premium).

  • PMI (private mortgage insurance) is applied to conventional loans. It can be canceled at 80% loan-to-value ratio (LTV), or removed automatically at 78% LTV
  • MIP (mortgage insurance premium) is applied to loans insured by the Federal Housing Administration (FHA loans). It cannot be canceled, and it will not be removed automatically — unless the homeowner bought with more than 10% down and paid MIP for a full 11 years

Because of the FHA’s mortgage insurance rules, many borrowers prefer conventional PMI. It will eventually fall off on its own, whereas most borrowers with FHA MIP are stuck paying it until they refinance or pay off their loan.

The same is true for USDA loans which require their own type of mortgage insurance called a guarantee fee.

You can read more about how to remove MIP here.

How do I get rid of private mortgage insurance (PMI) once I’ve purchased a home?

In general, PMI can be canceled once your loan’s principal balance drops to 80% of your home’s original appraised value; or, to 80% of your home’s current market value.

If you are a homeowner who already has PMI, that’s okay. You’re making an excellent return on your mortgage insurance investment.

Still, you may want to get rid of your PMI, and that’s totally possible.

Using a refinance, you can eliminate any type of mortgage insurance as long as your new loan amount is 80% or less of your home’s current value.

There are restrictions that sometimes apply, however. Depending on your lender and provider of PMI, you may be asked to show:

  • A history of timely payments
  • Aminimum number of payments made (usually 12)
  • Or, the absence of a second mortgage

Lenders are required to update you annually on your PMI cancellation options.

This includes notice of the Homeowners Protection Act of 1998, which required lenders to automatically terminate PMI once the homeowner reaches 78% loan-to-value (LTV), based on the lesser of the purchase price or appraised value from the date of purchase or refinance.

Note, though, that you must be current on your loan when you reach 78% LTV in order to have your PMI removed. If you’re not current at that time, your PMI will be terminated instead on the first day of the first month following the date you get current.

The Homeowners Protection Act of 1998 also states that homeowners are permitted to request PMI cancellation once they 80% LTV, based on the home’s original value.

However, the lender will not contact you when you are eligible for PMI cancellation. You will have to contact your lender.

Mortgage insurance FAQ

How can I avoid PMI without 20 percent down?

You can avoid PMI without 20 percent down if you opt for lender-paid PMI. However, you’ll end up with a higher mortgage rate for the life of the loan. That’s why some borrowers prefer the piggyback method: Using a second mortgage loan to finance part of the 20 percent down payment needed to avoid PMI. Veterans can avoid PMI with no down payment thanks to the VA loan program.

How can I avoid PMI with 10 percent down?

If you can make a 10 percent down payment, you could avoid PMI if you use a second loan to finance another 10 percent of the home’s purchase price. Combining these will satisfy your first mortgage lender’s 20 percent down payment requirement, avoiding PMI. This strategy is called an 80/10/10 piggyback loan.

Is avoiding PMI worth it?

PMI is a great tool for first-time home buyers. It allows you to make an ultra-low down payment and get into a home much sooner. So, for many home buyers, PMI is a good investment, especially if it means buying a home sooner instead of waiting years to save up 20 percent down.

How can I avoid PMI with 5 percent down?

Some borrowers can find special loan programs offering low-down-payment mortgages with no PMI. Most of these programs have income limits or other special qualifying conditions. Even if you can’t find a program that eliminates PMI, you may qualify for Freddie Mac’s Home Possible or Fannie Mae’s HomeReady loan, which allow you to buy with 3 percent down and reduced PMI payments.

What credit score will avoid PMI?

A higher credit score should lower your PMI premiums. But a high credit score by itself won’t eliminate PMI requirements. Instead, it’s your down payment size that lets you avoid PMI. Putting 20 percent down eliminates the need for PMI altogether.

Will banks waive PMI?

Many lenders will waive PMI in exchange for a higher mortgage rate. However, if you keep the loan long enough, the higher rate will cost more than PMI would have cost. You can avoid PMI without bumping up your mortgage rate if you put 20 percent down or opt for a piggyback loan.

Does PMI ever go away?

Yes, PMI will fall off your loan once you’ve paid it down to 78 percent of your home’s value. You can cancel PMI even sooner — when you’ve paid it down to 80 percent LTV — by contacting your loan servicer.

Who pays for PMI?

Borrowers pay for PMI, usually along with their monthly mortgage payments. Unlike homeowners insurance, PMI protects the lender and not the homeowner. A PMI policy would help the lender recover its losses if the borrower stopped making monthly payments on the loan.

Is PMI tax deductible?

For the 2021 tax year, taxpayers who earned less than $109,000 could deduct at least part of their PMI costs — but only if they itemize deductions instead of claiming the standard deduction. You’d need to work with a tax advisor to find out for sure whether you’d benefit from claiming this deduction.

Do jumbo loans have PMI?

Jumbo loans don’t always require PMI. These loans exceed the loan limit set by Fannie Mae and Freddie Mac. Since they don’t conform to the national guidelines, lenders have more leeway with Jumbo loans. But even if they don’t require PMI, a lender may require a 20 percent or larger down payment just to get approved. Or, lenders may want an applicant to show several years’ worth of monthly payments saved in a bank account.

Is PMI tax deductible?

For the 2021 tax year, taxpayers who earned less than $109,000 could deduct at least part of their PMI costs — but only if they itemize deductions instead of claiming the standard deduction. You’d need to work with a tax advisor to find out for sure whether you’d benefit from claiming this deduction.

Do jumbo loans have PMI?

Jumbo loans don’t always require PMI. These loans exceed the loan limit set by Fannie Mae and Freddie Mac. Since they don’t conform to the national guidelines, lenders have more leeway with Jumbo loans. But even if they don’t require PMI, a lender may require a 20 percent or larger down payment just to get approved. Or, lenders may want an applicant to show several years’ worth of monthly payments saved in a bank account.

Check your no-PMI loan options

There are plenty of ways for a creative home buyer to get around mortgage insurance.

If you want to avoid PMI but don’t have 20% down, talk to a few lenders about your options.

Chances are, you can get away without PMI and still have a reasonable payment thanks to today’s lower mortgage rates.