If you’re unable to make a down payment of 20% or more on a conventional mortgage, there’s a good chance you’ll have to pay private mortgage insurance (PMI).
PMI, which is arranged through a third-party insurance company, is designed to protect the lender if you’re unable to make payments. PMI doesn’t protect you against loss — if you don’t make payments, you could still face foreclosure — and it won’t prevent your credit score from dropping if your mortgage payments are late.
The annual cost of PMI usually ranges from 0.22% to 2.25% of the total amount of your mortgage, depending on your credit score. If your FICO score is higher than 740, your PMI payment on a $300,000 mortgage will likely be about $660 a year, or $55 a month. The lower your credit score, the higher your PMI will be.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you have to pay PMI, there are several ways to do it. With borrower-paid PMI, your premium is added to your monthly mortgage payment. Alternatively, you can pay PMI in a lump sum at closing. It may be less expensive to pay the annual cost upfront, but the premiums aren’t refundable if you sell your home before you reach 20% equity.
How to avoid private mortgage insurance
Even if you can’t afford a 20% down payment, there are several ways to avoid PMI. One option is lender-paid PMI, in which your lender pays your premiums as a lump sum and in exchange you pay a higher interest rate than you would pay otherwise. Lender-paid PMI may be a good choice if it would cost you less overall than monthly PMI payments and you itemize on your tax return, which would allow you to deduct interest on your mortgage.
A “piggyback mortgage” is another way to bypass PMI. With this strategy, you take out a second mortgage — usually a home equity line of credit — and finance the home with 10% from a down payment, 80% from the primary mortgage and 10% from the second mortgage. You’re borrowing 90% of the value of the home, but the primary mortgage accounts for only 80% of the value, allowing you to skip PMI. However, you’ll likely pay a higher interest rate for the second mortgage, and the rate may be adjustable.
This strategy could make sense if you can pay off the second mortgage relatively quickly, in which case the cost could be lower than paying PMI. Before agreeing to a piggyback, ask your lender to provide a quote for the same loan structured as a single mortgage with PMI so you can compare costs.
Another option is to seek out government home loans that don’t charge PMI. Mortgages from the FHA (Federal Housing Administration), USDA (U.S. Department of Agriculture) and VA (Department of Veterans Affairs) allow borrowers to make down payments as low as 0% to 3.5% without paying PMI. However, you may be required to pay up-front fees, and the loans have stringent eligibility requirements.
If none of these strategies is available to you, or the benefits don’t outweigh the costs, your best bet is to make mortgage payments on time until you reduce your loan balance to 80% of the home’s value. Your loan servicer is required to terminate PMI when your principal balance is scheduled to reach 78% of the original value of your home. However, you can ask your servicer to cancel PMI before that date, when payments have reduced the principal to 80% of the original value.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related Content
-
How to Get Apple TV Plus for just $2.99For a limited time, you can get three months of Apple TV Plus for just $2.99 per month. Here’s how to get the deal.
-
Stock Market Today: Stocks Surge to Close a Volatile WeekIt was another day with a week's worth of both news and price action, but it ended on a strongly positive note.
-
How to Get Apple TV Plus for just $2.99
For a limited time, you can get three months of Apple TV Plus for just $2.99 per month. Here’s how to get the deal.
-
Don’t Panic About the “Retail Blackout” – See Which Stores Are Closing (and Which Aren’t) for Easter 2025Dozens of major retailers are planning to close their doors on April 20. Find out which of your go-to stores are on the list.
-
Home Insurance: How to Cut Costs Without Losing CoverageNatural disasters are causing home insurance premiums to soar, but don't risk dropping your coverage completely when there are ways to keep costs down.
-
Why Homeowners Insurance Has Gotten So Very ExpensiveThe home insurance industry is seeing more frequent and bigger claims because of weather, wildfires and other natural disasters.
-
Zelle App Shut Down? Why Zelle Has Discontinued Its AppWith the Zelle app shut down, learn how you can still use Zelle and which other mobile payment apps you might want to consider.
-
Six Best Places to Live in FloridaPlaces to Live Florida offers a range of cities where you’re never far from the sound of lapping waves.
-
Use This 1-Year CD if You’ll Owe Taxes Next YearA one-year CD allows you to set money aside now for taxes you'll owe next year. We'll show our best choice.
-
How to Lower Home Insurance Rates When Climate Change Increases CostsA top insurer warns the damage climate change causes is making it cost-prohibitive for insurers in some areas. Learn how to protect your home and lower costs.
