Buying a home is one of the biggest financial decisions a person makes. For many first-time homebuyers, saving up a 20% down payment can be difficult. That’s where Private Mortgage Insurance, or PMI, often comes into the picture. While PMI can help people become homeowners sooner, it also adds to monthly expenses. The good news is it doesn’t have to stick around forever. Let’s explore what PMI is, how it affects your finances, and how to eliminate it faster to save money.
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance is a type of insurance that protects the lender—not you—if you stop making payments on your mortgage. It’s usually required if you make a down payment of less than 20% when buying a home with a conventional loan.
PMI is typically charged as a monthly fee added to your mortgage payment. It can also be required as an upfront fee or a combination of upfront and monthly costs. The amount you pay will vary based on the size of your mortgage, the down payment amount, and your credit score. On average, PMI can cost anywhere from 0.5% to 1.5% of your original loan amount each year.
Though PMI helps homebuyers qualify for a mortgage with a smaller down payment, it also increases the total cost of the loan. For example, someone buying a $250,000 home with a 5% down payment might pay about $100 to $200 extra a month in PMI.
How PMI Affects Your Budget
PMI adds to your monthly mortgage payment, which includes principal, interest, taxes, and insurance. As a result, your monthly housing costs can be higher than expected. Over the life of your loan, PMI can cost thousands of dollars unless you take steps to remove it.
Because PMI doesn’t protect you, just the lender, many homeowners want to get rid of it as soon as possible. Reducing or eliminating PMI can lower your monthly expenses and help you build home equity faster.
Ways to Eliminate PMI Faster
Reach 20% Equity
Most lenders require PMI until you build at least 20% equity in your home. Equity means the portion of your home that you actually own—what’s left after subtracting your loan balance from your home’s value. Once your equity reaches 20%, you can ask your lender to remove PMI. When your equity hits 22%, your lender is required by law to cancel PMI automatically, as long as your payments are current.
Make Extra Mortgage Payments
One of the fastest ways to get rid of PMI is by making extra payments toward your mortgage principal. Even small additional amounts each month can help you reach 20% equity sooner. For example, paying an extra $100 per month can save years of PMI payments.
Refinance Your Mortgage
If your home’s value has gone up significantly, you may be able to refinance into a new loan without PMI. Refinancing can not only help remove PMI but may also secure a lower interest rate if market rates have dropped. Keep in mind that refinancing usually comes with closing costs, so make sure the savings from removing PMI outweigh the fees.
Get a New Appraisal
If your neighborhood has seen an increase in home values, your home may be worth more than you originally paid. You can pay for a professional appraisal to prove your home’s higher value and request the lender remove PMI sooner than planned.
PMI Alternatives: Which Option Is Right for You?
Lender-Paid Mortgage Insurance (LPMI)
Lender-Paid Mortgage Insurance means your lender pays for the PMI, but you’ll pay a slightly higher interest rate on your mortgage. This can keep your monthly payments lower than a standard PMI setup, but you might pay more over the life of the loan due to the higher interest rate.
LPMI might be a good choice if you plan to sell or refinance within a few years. However, unlike traditional PMI, it can’t be canceled, so it’s important to consider your long-term goals before choosing this option.
Piggyback Loans
A piggyback loan involves taking out two loans: one for 80% of the home’s price and another for 10%, while you pay the remaining 10% as a down payment. This method helps you avoid PMI by technically keeping your main loan at 80% loan-to-value (LTV).
While it avoids PMI, a piggyback loan includes another monthly payment and possibly a higher interest rate. It’s a more complex setup, but it may save money over time if PMI costs would be high.
Choosing the Best Option
Deciding how to handle PMI comes down to understanding your budget, timeline, and long-term financial plans. If you can reach 20% equity quickly through extra payments or a home value increase, removing PMI sooner could save thousands. If you’re just starting and want to avoid PMI from the beginning, LPMI or a piggyback loan could be worth considering—with careful comparison of total costs.
Remember, owning a home is about more than just your mortgage payment. Every dollar you save on added costs like PMI can go toward building real wealth and enjoying the home you worked hard to buy.
Conclusion
Private Mortgage Insurance helps people become homeowners with smaller down payments, but it can significantly increase monthly housing costs. Fortunately, there are clear strategies to eliminate PMI faster—like building equity, refinancing, or exploring alternatives such as LPMI and piggyback loans. Understanding how PMI works and making smart financial choices can help you save money and reach full ownership faster.
Share this content:
