Mortgage lenders want assurance that when they lend money, it will be paid back. Private mortgage insurance protects lenders in the event you default on your loans. 

To help you understand more about PMI, here are the basics:

What is PMI? 

Private mortgage insurance (PMI) protects lenders if a borrower defaults on a loan. PMI solely benefits the lender while adding to your expenses as a homeowner. Generally, mortgage lenders require a down payment of at least 20% of the home’s purchase price to borrow without getting PMI. 

How to avoid PMI

Choosing a 20% down payment out of pocket is the most common way to avoid private mortgage insurance. Not only will you save on the extra insurance, you may get lower interest rates on your mortgage for a large down payment. 

Some homeowners with substantial savings utilize the piggyback loan method, also referred to as an “80-10-10 loan”. With this strategy, you take out two different loans: one for 80% of the total home price, the other for 10%. Using the 10% loan to supplement your savings, you can effectively pay only 10% for your down payment out of pocket.

Canceling PMI

Luckily, you don’t have to pay for PMI forever – but it can be tricky to cancel payments. One way to cancel these payments is paying up until your loan balance reaches 80%. Essentially, once you’ve paid off at least 80% of your loan balance, you can request cancellation of PMI from your lender.

Another avenue to canceling PMI is to refinance your mortgage. If the cost of the new mortgage balance is below 80%, you can request cancellation of PMI. With this option, it’s good to compare closing costs of the new mortgage to PMI cost. The closing costs should equate to less than the cost of the PMI. 

PMI is an extra expense for loan borrowers, but it doesn’t have to be. Keep these tips in mind and consult a real estate agent for guidance and more information about private mortgage insurance and choosing the right down payment amount.