How to Avoid PMI When Buying a Home

Key takeaways

• PMI protects the lender, not you: Required on conventional loans when your down payment is under 20%, it covers the lender if you default, not you.
• Multiple ways to avoid it: A 20% down payment is the simplest route, but piggyback loans (80/10/10), lender-paid mortgage insurance (LPMI), VA loans, and USDA loans can all help you skip PMI.
• You can remove PMI later: Request cancellation at 80% loan-to-value, or it automatically drops at 78%, and rising home values can speed up the process.

Private mortgage insurance, or PMI, protects the lender – not the buyer – if you default on your loan. It is commonly required when you put down less than 20% on a conventional mortgage. While PMI can help buyers purchase a home sooner, many homeowners want to avoid the added monthly cost whenever possible.

The good news is that avoiding PMI is possible, and several strategies can help you do it without making a full 20% down payment. Below, we’ll walk through practical ways to reduce or eliminate the need for PMI based on current lending guidelines.

What is PMI?

PMI, or private mortgage insurance, is an insurance policy that lenders require on many conventional loans when, generally speaking, the borrower puts down less than 20%. The cost is typically added to your monthly mortgage payment and continues until you reach at least 20% equity in your home. In practice, you’ll usually need to request PMI removal once you reach 20% equity, as it does not automatically drop off until your loan reaches 78% of the home’s original value.

PMI generally costs between 0.5% and 1.5% of the loan balance per year, depending on your credit score, down payment, and lender. 

How much does PMI cost?

Private mortgage insurance, or PMI, typically costs between 0.46% and 1.5% of your loan amount each year. Your exact rate depends on factors such as your credit score, the size of your down payment, and the insurer your lender uses. Because rates can change, it is best to treat any estimate as a starting point rather than a guarantee.

To estimate your monthly PMI, take your loan amount, multiply it by your PMI rate (as a decimal), and divide by 12.

For example, on a $500,000 loan with a 5% down payment:

• Strong credit (760+): about $192 per month (0.46%)
• Average credit (680 – 719): about $354 per month (0.85%)
• Lower credit (620 – 639): about $625 per month (1.5%)

If you are looking to reduce your PMI before closing, two factors can make a meaningful difference: your credit score and your down payment. Even a small improvement in either can help you qualify for a lower rate and reduce your monthly cost.

Actual PMI rates vary widely based on your loan-to-value ratio, debt-to-income ratio, and the mortgage insurer, so quotes can differ meaningfully between lenders.

How to calculate your estimate

Since PMI rates change daily, you can use this simple two-step formula to project your costs once you have a quoted rate from a lender:

1. Find the annual total: Multiply your total loan amount by the PMI rate (as a decimal).
   Annual PMI = Loan Amount×PMI Rate
2. Determine the monthly payment: Divide that annual total by 12.

Monthly PMI = 12 × Annual PMI​

Pro-Tip: To lower this monthly expense, focus on boosting your credit score or increasing your down payment closer to the 10% or 15% mark before closing.

Private mortgage insurance example

Let’s put those numbers into perspective with an example. Imagine you’re buying a $400,000 home, and your loan amount is the full $400,000. If your PMI rate is 0.75%, here’s how it breaks down:

• Annual PMI: $400,000 multiplied by 0.0075 (the decimal equivalent of 0.75%) equals $3,000.
• Monthly PMI: Dividing that annual amount by 12 months means you’d pay $250.00 each month for PMI.

This added monthly cost highlights why many homebuyers look for ways to avoid PMI if possible.

How to avoid PMI when buying a home?

1. Make a 20% down payment or more

It is the most straightforward way to avoid PMI. If you can put down 20% or more of the home’s purchase price, lenders typically won’t require PMI because you have more equity in the home from the start, which reduces their risk. However, for many individuals and especially first-time homebuyers, saving up such a substantial amount can be a significant challenge. 

2. “Piggyback” second mortgage (80/10/10 loan)

This strategy involves taking out two loans simultaneously:

• A first mortgage for 80% of the home’s value.
• A second mortgage (often a Home Equity Line of Credit or HELOC) for a portion of the remaining amount, typically 10%.
• You then make a 10% cash down payment.

This structure is known as an 80/10/10 loan (80% first mortgage, 10% second mortgage, 10% down payment). Since your first mortgage has an 80% loan-to-value (LTV) ratio, you avoid PMI on that primary loan.

Pros of a piggyback loan:

• Avoids PMI.
• Allows you to buy with less than 20% down.
• The second mortgage (HELOC) can sometimes be paid off faster, freeing up funds.

Cons of a piggyback loan:

• You’ll have two monthly mortgage payments.
• The interest rate on the second mortgage is often higher than the first mortgage and can be adjustable (variable).
• You’ll likely incur closing costs for both loans.
• Qualifying for two loans can be more complex and may require a higher credit score.

3. Lender-Paid Mortgage Insurance (LPMI)

With lender-paid mortgage insurance (LPMI), the lender pays the mortgage insurance premium instead of requiring you to pay it directly. In return, the lender typically charges a slightly higher interest rate.

Pros of LPMI:

• No separate monthly PMI payment.
• Potentially lower monthly out-of-pocket payment compared to borrower-paid PMI.

Cons of LPMI:

• The higher interest rate lasts for the life of the loan (unless you refinance), even after you’ve built significant equity. With traditional PMI, you can usually get it removed once you reach 20-22% equity.
• Over the long term, LPMI can end up costing you more than traditional PMI.

4. Choose a loan program that doesn’t require PMI

Not all mortgage programs require traditional PMI:

VA loans (0% down)
Available to qualifying veterans and active-duty service members. VA loans do not require PMI, though they include a one-time funding fee.

USDA loans (0% down)
Designed for eligible rural and suburban areas. While USDA loans do not require PMI, they do include guarantee fees, which typically cost less than PMI.

Some specialty conventional loans
Some lenders offer no-PMI loans to borrowers with excellent credit, though these may have stricter qualification requirements.

Your credit score influences your PMI rate. A better score generally means a lower PMI cost. Raising your credit score from the mid-600s to the low-700s can meaningfully reduce PMI premiums, even if you still need to pay them.

Ways to improve your credit:

• Pay bills on time
• Reduce credit card balances
• Keep old accounts open
• Limit hard inquiries

6. Refinance once you reach 20% equity

If you cannot avoid PMI at the time of purchase, you can still work to remove it later. Once you reach at least 20% equity, either by paying down the loan or through rising home values, you can request that your lender remove PMI.

If interest rates are favorable, refinancing into a new conventional loan without PMI may offer additional savings. Keep in mind, refinancing isn’t required to remove PMI, as you can often request cancellation directly from your loan servicer once you meet equity requirements.

Quick guide to avoiding or removing PMI

 

Strategy	Down Payment	Key Benefit	Tradeoff	Best For
20% down payment	20%	No PMI and lower monthly cost	Requires significant savings	Buyers with strong savings and flexible timing
Piggyback loan (80/10/10)	10%	Avoid PMI with less cash upfront	Two loans and a higher second rate	Buyers close to 20% who want to buy sooner
Lender-paid PMI (LPMI)	5 – 10%	No separate PMI payment	Higher rate over time	Buyers planning to sell or refinance in a few years
VA loan	0%	No PMI and no down payment	Limited eligibility and funding fee	Eligible veterans and service members
USDA loan	0%	No PMI with low rates	Location and income limits	Buyers in eligible rural or suburban areas
Refinance later	N/A	Remove PMI after building equity	Closing costs and timing risk	Homeowners with growing equity

Please note, these examples above are illustrative: Your actual PMI rate will depend on your specific loan details and lender pricing.

How to remove Private Mortgage Insurance (PMI)

Many homeowners pay private mortgage insurance (PMI) as part of their monthly mortgage payment, but you may be able to have it removed. Fannie Mae, a major player in the mortgage market, outlines how this process works.

When can you request PMI removal?

You can request that your loan servicer terminate PMI once your loan balance reaches 80% of your home’s original value. Your lender provided you with an amortization schedule when you bought your home. This schedule shows you exactly when your loan balance is projected to hit that 80% mark. Keep an eye on this date and your loan progress, as it’s often when you become eligible to remove PMI.

Automatic PMI termination

Even if you don’t request it, your PMI may be automatically terminated when your loan balance reaches 78% of your home’s original value. However, to avoid paying more than necessary, it’s best to contact your loan servicer as soon as your balance reaches 80% to see if you qualify for early termination.

Requesting termination based on the current home value

If your home’s value has increased significantly since you bought it, you might be able to remove PMI sooner based on its current market value. To explore this option, reach out to your loan servicer to discuss their specific requirements and the process for terminating PMI based on increased home equity. Lenders typically require a new appraisal and may impose seasoning requirements (such as owning the home for at least two years) before allowing PMI removal based on increased value.

When PMI can be worth it

Avoiding PMI is a great goal, but it’s not always the right decision. In some situations, paying PMI allows you to buy sooner, giving you:

• Earlier access to equity growth
• Protection against rising home prices
• The ability to secure a home before interest rates increase further

In some cases, the cost of waiting can outweigh the cost of PMI. If paying PMI allows you to buy your home sooner and the monthly payment remains manageable, it can still be a smart financial move.

FAQ: How to avoid PMI when buying a home

How do I avoid PMI when buying a house?

You can avoid PMI by putting down at least 20% on a conventional loan, using an 80-10-10 piggyback loan, choosing lender-paid PMI (LPMI), or qualifying for a mortgage program that doesn’t require PMI, such as a VA or USDA loan. You can also eliminate PMI later by refinancing once you reach 20% equity.

What is the 78% rule for PMI?

The 78% rule refers to the federal requirement that a lender must automatically remove PMI when your loan balance reaches 78% of the home’s original value, assuming you’re current on payments. This happens through regular amortization, with no refinance or new appraisal required.

How much do I need to put down on a house to avoid PMI?

To avoid PMI on a conventional mortgage, you generally need to put down 20% of the home’s purchase price. Some buyers also avoid PMI with alternative structures like an 80-10-10 loan, which requires only 10% down.

How much is PMI insurance on a $400,000 house?

According to the Rocket Mortgage calculator, as of early 2026, private mortgage insurance (PMI) on a $400,000 home typically costs between $170 and $500 per month ($2,000 to $6,000 annually), depending on your credit score and down payment. With a 5% down payment, a common monthly cost ranges from about $300 to $365. In general, PMI costs between 0.5% and 1.5% of the annual loan amount.

Bottom line: How to avoid PMI

PMI is a common part of the homebuying process, but it is not unavoidable. Whether you increase your down payment, explore a piggyback loan, or use a mortgage program that eliminates PMI, you have more options than you might think.

Choosing the best strategy depends on your finances, your long-term plans and how quickly you want to buy. If avoiding PMI is a priority, talk to your lender early so they can help you compare all available options.

 

The post How to Avoid PMI When Buying a Home appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.

from Redfin | Real Estate Tips for Home Buying, Selling & More https://ift.tt/4L9Rc6Y