When you buy a home with a small down payment, your lender might require you to pay for Private Mortgage Insurance (PMI). PMI protects the lender if you stop making payments, but it adds an extra cost to your monthly bill. Knowing how PMI works and how to avoid or remove it can save you a lot of money.
Why Lenders Require PMI?
Lenders see loans with less than 20% down as higher risk. To reduce their risk, they require PMI. If you default on the mortgage, the insurance company covers a portion of the lender’s loss. Even though PMI protects the lender, not you, it’s still something you must pay if your down payment is small.
It usually remains until you build up enough home equity.
How Much Does PMI Cost?
PMI typically costs between 0.3% and 1.5% of your original loan amount per year. The exact rate depends on your credit score and the size of your down payment. For example, on a $250,000 loan, PMI could add around $100 to $300 to your monthly mortgage payment.
Some lenders allow you to pay PMI upfront, but most include it with your monthly payment.
How to Avoid Paying PMI?
The simplest way to avoid PMI is by making a down payment of at least 20%. If that’s not possible, some lenders offer special loan programs that don’t require PMI, although they might charge a higher interest rate instead. Also, VA loans for veterans usually don’t require PMI even with no down payment.
Comparing lender offers carefully can help you find a more affordable option.
How to Remove PMI?
Once you reach 20% equity in your home, you have the right to request PMI cancellation. This usually means your mortgage balance is 80% or less of your home’s current market value. Some lenders will remove PMI automatically once you hit 22% equity. You’ll likely need a home appraisal to prove your property’s value.
Following up with your lender can help you remove PMI sooner and lower your monthly costs.
Different Types of PMI
There are different ways PMI can be set up. Borrower-paid PMI (BPMI) is the most common, where you pay monthly. Lender-paid PMI (LPMI) includes the cost in a higher mortgage rate instead of a separate payment. There’s also single-premium PMI, where you pay it all at once during closing.
Understanding these options helps you choose the method that costs you the least over time.
Is PMI Tax Deductible?
In some cases, you might be able to deduct PMI payments on your federal income taxes. However, the rules change often based on current tax laws. It’s best to consult a tax professional to see if you qualify and how it can affect your overall financial picture.
Taking advantage of deductions can slightly offset the extra cost of PMI.
Conclusion
Private Mortgage Insurance is an extra cost you may have to pay if you can’t put down 20% when buying a home. While it increases your monthly expenses, it also allows you to buy a home sooner without waiting to save a large down payment. Understanding how PMI works, how much it costs, and how to remove it quickly can save you money and strengthen your long-term financial position.