Private mortgage insurance, or PMI, is an added cost on a conventional loan when a buyer puts less than 20% down on a conventional loan. Because it increases the monthly payment without protecting the buyer, many buyers want to know whether they can avoid it, reduce it, or remove it later.
Key Takeaways
- PMI usually applies when a conventional loan has a down payment of below 20%.
- A 20% down payment is the standard way to avoid PMI on a conventional mortgage.
- Buyers with less than 20% down may still have workable alternatives.
- PMI can often be removed later once equity is enough.
- Comparing the full cost of buying is usually more helpful than focusing solely on PMI.
What Is PMI?
Private mortgage insurance, or PMI, is an added cost on a conventional mortgage to protect the lender if the buyer falls behind on payments or defaults on the loan. Lenders require PMI because a down payment of less than 20% means the loan starts with less borrower equity and more lender risk.
In simple terms, the buyer is borrowing a larger share of the home’s value, so PMI helps offset that risk. PMI increases the monthly payment without providing any protection, which is why many want to avoid it.
How to Avoid PMI on a Conventional Loan
To avoid PMI on a conventional loan, first-time home buyers typically need to put 20% down payment. That’s because a 20% down payment brings your loan-to-value ratio to 80% or less, which is where PMI is no longer required. Still, that does not mean every first-time buyer should wait until they have a 20% down payment.
For some buyers, it is more practical to buy sooner with a smaller down payment and remove PMI once enough equity has built up. A larger down payment can also leave a buyer with less cash for closing costs, moving expenses, repairs, or reserves after closing.
How to Avoid PMI Without a 20% Down Payment
When a 20% down payment is not realistic, first-time homebuyers may still use other loan options to avoid PMI or make the added cost easier to manage.
Use a Piggyback Loan
A piggyback loan combines a first mortgage with a smaller second loan to keep the first mortgage to avoid PMI. But it does not automatically make the loan cheaper. Instead of paying for PMI, the buyer takes on an additional loan payment. It’s still best to compare the full monthly payment, not just whether PMI shows up on the loan estimate.
Consider a VA-Backed Loan
For eligible veterans, active-duty service members, and some surviving spouses, a VA-backed loan can be a strong alternative. VA loans offer a path to homeownership without the monthly PMI that comes with a conventional loan. Even so, it is still worth comparing the full loan structure, including fees, monthly payments, and long-term affordability.
Compare USDA Loans
USDA loans may be an option for eligible buyers purchasing in qualified rural areas. They do not use traditional PMI, but that does not mean there are no added loan-related costs. Depending on the program, buyers may still pay upfront and annual fees.
FHA Loans Still Include Mortgage Insurance
FHA loans may help buyers purchase a home with a lower down payment, but they usually still require mortgage insurance premiums (MIP). For buyers comparing options, a side-by-side comparison can help explain the differences.
Can PMI Be Removed Later?
Yes, PMI can usually be removed once the loan reaches the required equity level and the lender’s conditions are met. According to the Consumer Financial Protection Bureau, borrowers can usually request PMI removal at 80% loan-to-value, and it automatically ends at 78%, if payments are current.
What First-Time Buyers Should Compare Before Deciding
Before deciding, first-time buyers should compare the full cost of buying, not just the down payment. That usually includes:
- Monthly payment
- Down payment and closing costs
- Cash reserves after closing
- Whether you qualify for VA or USDA financing
- How long will PMI stay in place if you move forward with it
Based on REMAX’s experience with first-time buyers, many buyers focus first on the down payment needed to avoid PMI, but the more important question is often how the full monthly payment fits alongside taxes, insurance, and other upfront costs.
Frequently Asked Questions
Do first-time buyers always have to pay PMI?
No. First-time buyers usually pay PMI on a conventional loan only if their down payment is less than 20%. If the buyer puts 20% down or uses a loan program that works differently, PMI may not apply.
Why do lenders require PMI?
Lenders usually require PMI when a buyer pays a down payment of less than 20% because the loan starts with less borrower equity and more lender risk.
Is it better to wait and save 20% or buy sooner with PMI?
That depends on the buyer’s budget, timeline, and market. For some buyers, waiting makes sense. For others, buying sooner with a smaller down payment may be the more practical option.
Avoiding PMI
If you are trying to figure out how to avoid PMI, the simple answer is usually 20% down on a conventional mortgage. But for many first-time buyers, that is only part of the decision. The more useful question is which option allows you to buy without straining your finances too much.
For some buyers, avoiding PMI upfront will make sense. For others, it may be more practical to buy with a smaller down payment, keep the monthly payment manageable, and work toward removing PMI later.
A local REMAX agent can help you compare loan options and homebuyer incentives that might work best for you.
