What is Private Mortgage Insurance? Do I Need PMI? How do I Avoid PMI?

If you are buying a home, eventually somewhere along the way you will hear the term Private Mortgage Insurance or PMI.  Most first time home buyers deciding to buy their first home and start the mortgage process do not know they may need to get Private Mortgage Insurance to get a home mortgage.  It ends up being one more added expense when purchasing a home.

What is Private Mortgage Insurance?

As a borrower who puts down less than a 20% down payment for a home loan you will be required to pay insurance premiums for the bank to cover any losses if you are foreclosed upon.  The insurance is called Private Mortgage Insurance (PMI).  PMI will also be required if you refinance your home for less than 20% equity.

Private Mortgage Insurance premiums run between .3% and 1.5% of the purchase amount on a yearly basis.  Premiums vary based upon the down payment amount and your credit score.  The PMI premium is usually a monthly line item expense on your mortgage statement.

Remember PMI benefits the lender not you.  If you miss mortgage payments you will most likely end up in foreclosure.

FHA Backed Loans and PMI

FHA loans are slightly different when it comes to Private Mortgage Insurance.  It is called Mutual Mortgage Insurance but it is essentially the same thing.  The difference is the premium is a combination of an up front fee at closing and monthly premium payments.

Do I Have to Get Private Mortgage Insurance?

The quick answer is yes.  If your down payment is less than 20% most likely you will have to pay PMI.  You just won’t really have many options to avoid it. 

How to Avoid Paying PMI

Like previously stated PMI is kind of a necassary evil and these are the only ways I know of to eliminate PMI.

• A larger down payment of 20% or more and you avoid paying the monthly PMI premium.
• Find a loan program that does not have a Private Mortgage Insurance requirement.  They do exist but be aware they are what is called self insured.  They do usually charge a higher interest rate to cover the equivalent of PMI.  Do not assume just because there is no PMI payment that that particular product is cheaper.  Do the math.
• Get a VA Loan.  VA Loans carry no PMI but they are for a limited group of buyers…. Veterans of the Armed Forces.
• A Piggy Back Loan.  Not very common anymore but a second loan for the balance of your down payment and the 20% would avoid a PMI payment.  A 80/15/5 was a common product 12 years ago.  meaning the first mortgage was 80% of the purchase price, the second mortgage was 15% of the purchase price and the buyer provided 5%.    Due to the last real estate downturn the piggy back loan is generally no longer available.  As the real estate market strengthens we may see a rise in piggyback mortgages.

Can Private Mortgage Insurance be Removed?

The good news is in most cases Private Mortgage Insurance can be removed somewhere down the road.  Here is how:

• Most lenders by law are required to drop PMI when a LTV of 78% is reached based on the original purchase price.  LTV meaning loan to value ratio…. your equity being 22% and the banks financial stake being 78%.    Just by doing nothing a 395k purchase with 5% should have the PMI drop off in 2026.
• Prove to the bank you have 20% equity in the home through an appraisal.  Your equity stake may be higher because of an appreciating market or a significant home remodel.  The cost of the appraiser lies soley on the home owner.
• Refinance your home.  Refinancing is the sure fired way to remove PMI if you have a 20% equity stake in your home.  Make sure the numbers make sense because there is usually a cost to refinancing. 
• Pay down your mortgage.  Paying down your mortgage can get your equity stake down quicker.  maybe you have had significant income increase, an inheritance etc… that allows you to make extra payment or a lump sum.

Before your run off half cocked and get an appraisal, check with your lender what their policy is on removing PMI.  Not all banks will remove PMI at a 20% equity stake with an appraisal.

Final Thoughts On PMI

If you are putting less than 20% down on your home purchase, you are probably going to be paying Private Mortgage insurance  While PMI can be a tough pill to swallow at first, remember Private Mortgage Insurance allows borrowers to put a low down payment on a home.  It makes home ownership more obtainable for many who can’t get together a 20% down payment.

At the end of the day PMI allows you to buy that home with very little money down.  Without it you would have to save 20% which is a very hard thing to do.

Need help getting pre-approved? Give me a call and I will set you up with the right lender-  978-360-0422

Other Real Estate Resources:

• Consumer Financial Protection Bureau  About PMI
• Bill Gassett  Low Money Down Options for Home Buyers
• Kyle Hiscock   Hidden Costs of Buying a Home
• Luke Skar  The Home Buying Process Explained
• Anita Clark  First Time Home Buyer Tips

This article, What is Private Mortgage Insurance? Do I Need PMI? How do I Avoid PMI? is written by Kevin Vitali of EXIT Group One Real Estate. I have 13 years of experience preparing and listing homes for sale. One of my services is helping you put a plan in place to prepare your home for sale. if you are thinking of selling your home give me a call at 978-360-0422 or email me at kevin@kevinvitali.com

Real Estate Services in the following areas: Northeast Massachusetts, Merrimack Valley, North Shore and Metrowest. Including the following communities and the surrounding area- Amesbury, Andover, Billerica, Burlington, Chelmsford, Dracut, Groveland, Haverhill, Lowell, Melrose, Merrimac, Methuen, Middleton, North Andover, North Reading, Reading, Stoneham, Tewksbury, Tyngsborough, Wakefield, Wilmington, Westford