If you put less than 20% down on a conventional home loan, you will most likely pay something called PMI (private mortgage insurance). Many first-time buyers do not know about this charge until they see it in their monthly payment. Understanding PMI can save you a meaningful amount.
What is PMI and who benefits?
PMI protects the lender, not you. When you put little down, the lender loans a high percentage of the home's price, so their risk is greater. PMI reimburses the lender if you fail to repay. You pay the premium, but it does not protect you. PMI typically costs about 0.3% to 1.5% of the loan amount per year, depending on your credit score and down payment, spread across monthly payments.
How to avoid PMI from the start
- Put 20% or more down on a conventional loan, the most direct way to skip PMI.
- VA loans (for eligible service members and veterans) have no PMI even with a low down payment.
- Some low-down-payment programs like Fannie Mae HomeReady or Freddie Mac Home Possible allow PMI to be canceled earlier and sometimes at a lower rate.
- There is a structure called lender-paid PMI, where the lender pays the PMI in exchange for a slightly higher interest rate. This is a trade-off worth calculating carefully.
A note about FHA
FHA loans do not use PMI but use a mortgage insurance premium (MIP), which is a bit different. On many FHA loans today, MIP lasts the entire loan term if you put less than 10% down. The common way to shed MIP is to refinance into a conventional loan once you have enough equity in the home.
How to remove PMI on a conventional loan
Here is the good news, because PMI is not permanent:
- Automatic cancellation at 78%: By federal law, the lender must drop PMI when your loan balance falls to 78% of the home's original value, if you are current on payments.
- Request cancellation at 80%: You have the right to ask for PMI removal when your balance reaches 80% of the original value.
- Rising home value: If your area appreciates, you can request a new appraisal. If your equity hits 20% because of appreciation or your own improvements, you may remove PMI sooner.
- Pay extra principal: Paying a bit more each month helps you reach the 20% mark faster.
Do not wait passively
Many families overpay PMI for months because they do not realize they already qualify to remove it. Track your loan balance and home value, then proactively contact your lender when you reach the milestone.
If you want to know how much PMI you are paying and when you can remove it, reach out to William for a free consultation. He can help you time it and compare whether refinancing makes sense.