What Is PMI and How to Avoid It on Your Mortgage

The Hidden Cost That Adds Up Fast

If you're buying a home with less than 20% down, there's an extra cost built into your monthly payment that many buyers don't fully understand: Private Mortgage Insurance (PMI). While PMI makes homeownership possible with a smaller down payment, it can add $100-$400+ per month to your payment. Here's everything you need to know.

What Is PMI?

Private Mortgage Insurance protects the lender — not you — in case you default on your mortgage. When you put less than 20% down on a conventional loan, the lender requires PMI because you have less equity (skin in the game) in the property.

How Much Does PMI Cost?

PMI typically ranges from 0.3% to 1.5% of the original loan amount per year, depending on:

Your credit score

Your down payment amount

Your loan-to-value (LTV) ratio

The type of PMI you choose

Example: On a $300,000 loan with average PMI of 0.7%, you'd pay $2,100/year or $175/month.

PMI vs. MIP: What's the Difference?

PMI = Private Mortgage Insurance on conventional loans. Can be removed.

MIP = Mortgage Insurance Premium on FHA loans. Generally lasts the life of the loan (unless you put 10%+ down, then it drops off after 11 years).

This is an important distinction. FHA mortgage insurance is harder to eliminate than conventional PMI.

5 Strategies to Avoid or Eliminate PMI

Strategy 1: Put 20% Down

The most straightforward approach. With 20% equity from day one, PMI is never required. On a $300,000 home, that's $60,000 down. For many buyers this isn't realistic — but if you have the funds, it's the cleanest solution.

Strategy 2: Piggyback Loan (80/10/10)

Take out two loans simultaneously:

First mortgage: 80% of the home price (no PMI required)

Second mortgage (HELOC or home equity loan): 10% of the home price

Your down payment: 10%

This avoids PMI entirely, though the second mortgage typically has a higher interest rate. Run the numbers — sometimes the piggyback costs less than PMI, sometimes it doesn't.

Strategy 3: Lender-Paid PMI (LPMI)

Some lenders offer to pay your PMI in exchange for a slightly higher interest rate (typically 0.25-0.50% higher). The advantage is no separate PMI payment and the rate is tax-deductible. The downside: you can't remove it later without refinancing.

When LPMI makes sense:

You plan to keep the loan for 5 years or less

The rate increase is modest (under 0.375%)

You want the simplicity of one payment

Strategy 4: Request PMI Removal (Existing Loans)

If you already have PMI on your conventional loan, you can request removal when:

Automatic termination: PMI must be removed when your loan balance reaches 78% of the original purchase price (based on the original amortization schedule)

Borrower-requested removal: You can request PMI removal when your balance reaches 80% of the original value. You may need a new appraisal.

Home value increase: If your home has appreciated significantly, a new appraisal showing at least 20% equity can justify PMI removal

Strategy 5: VA or USDA Loans

Neither VA nor USDA loans require PMI:

VA loans: No mortgage insurance at all. There's a one-time VA funding fee (1.25-3.3%), but no monthly insurance.

USDA loans: Have a small annual guarantee fee (0.35%), which is much lower than conventional PMI.

The Real Cost of PMI Over Time

Let's see how PMI impacts your total cost:

$300,000 home, 5% down, 6.25% rate, 0.7% PMI:

Monthly PMI: $175

PMI duration (until 80% LTV): approximately 7 years

Total PMI paid: approximately $14,700

That's a significant amount — but it also enabled you to buy the home with just $15,000 down instead of $60,000. The equity you build and potential appreciation over those 7 years often far outweigh the PMI cost.

When PMI Is Actually Worth It

PMI gets a bad reputation, but it's not always the enemy:

If home prices are rising, buying now with PMI beats waiting to save 20% while prices increase

If rent is expensive, PMI + mortgage can be comparable to rent — but you're building equity

If you can remove PMI quickly through extra payments or appreciation, the cost is minimal

Let Us Run the Numbers for You

The Taberne Group calculates PMI costs for every scenario and helps you choose the strategy that saves the most money over time. We'll compare 5% down with PMI vs. 10% down vs. piggyback loans vs. lender-paid PMI so you can make an informed decision. Call us at (215) 266-0663 or start your application at movement.com. We serve homebuyers across Pennsylvania and New Jersey.