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First-Time Homebuyer 101:
Everything You Need to Know About PMI

Private Mortgage Insurance (PMI) is a crucial aspect of the home-buying process that many potential homeowners often encounter but might not fully understand. Whether you’re a first-time buyer or a seasoned investor, understanding PMI is essential as it can significantly impact your financial planning when purchasing a home. In this comprehensive guide, we’ll dive deep into what PMI is, how it works, when it applies, and strategies to manage or avoid it altogether.

What is Private Mortgage Insurance?

Private Mortgage Insurance, often abbreviated as PMI, is a type of insurance policy that protects lenders in case the borrower defaults on their mortgage payments. This insurance is typically required when the borrower makes a down payment that is less than 20% of the home’s purchase price. The primary purpose of PMI is to mitigate the risk to lenders associated with lower down payments, thereby enabling borrowers to qualify for loans they might not otherwise secure due to insufficient down payment funds.

How does PMI work?

PMI functions as a safeguard for the lender, not the borrower. If you, as the borrower, default on your mortgage payments and the lender forecloses on the property, PMI reimburses the lender for their losses up to the amount covered by the policy. This insurance does not protect you as the homeowner; it exists solely to protect the lender’s interests.

When does PMI Apply?

PMI is typically required in situations where the down payment made by the borrower is less than 20% of the home’s purchase price. This threshold is considered significant because lenders perceive higher risks associated with borrowers who invest less of their own money upfront. PMI payments are added to the borrower’s monthly mortgage payments until the loan-to-value (LTV) ratio reaches 78-80%, at which point the borrower can request cancellation of PMI.

How much does PMI cost?

The cost of PMI varies depending on several factors, including the size of the down payment, the loan amount, the borrower’s credit score, and the insurer’s premium rates. Typically, PMI premiums range from 0.3% to 1.5% of the original loan amount per year. For example, on a $200,000 mortgage with a 1% PMI rate, the annual PMI cost would be $2,000, which translates to an additional $167 per month added to your mortgage payment.

Ways to Manage or Avoid PMI

Make a larger down payment – The most straightforward way to avoid PMI is to make a down payment of at least 20% of the home’s purchase price. By doing so, you eliminate the need for PMI altogether, which can save you significant money over the life of your mortgage.

Lender-Paid Mortgage Insurance (LPMI) – In some cases, borrowers have the option to choose Lender-Paid Mortgage Insurance, where the lender pays the PMI upfront in exchange for a slightly higher interest rate on the mortgage. This can be beneficial for borrowers who prefer to have a single, consolidated monthly payment.

Piggyback Mortgage – Another strategy to avoid PMI is to structure your financing with a piggyback mortgage. This involves taking out two loans simultaneously: one for 80% of the home’s value, a second for the remaining amount needed to reach a 20% down payment. While this method can be more complex and may have higher interest rates, it eliminates the need for PMI.

Improve your credit score – A higher credit score can sometimes lower the cost of PMI premiums. By improving your creditworthiness before applying for a mortgage, you may qualify for better PMI rates, potentially reducing your overall housing costs.

How to Cancel PMI

Once you’ve paid down your mortgage to a point where the loan-to-value ratio reaches 78-80%, you can request cancellation of PMI. Federal law mandates that lenders must automatically cancel PMI once the loan-to-value ratio reaches 78% of the home’s original value, provided you are current on your payments. It’s essential to keep track of your payments and the remaining loan balance to ensure PMI cancellation at the earliest eligible opportunity.


Private Mortgage Insurance is a significant consideration for anyone purchasing a home with less than a 20% down payment. While it adds to the overall cost of homeownership, PMI enables borrowers to access financing they might not otherwise qualify for due to insufficient upfront funds. Understanding how PMI works, its costs, and strategies to manage or avoid it can empower you to make informed decisions when navigating the home-buying process. Whether you choose to make a larger down payment, explore alternative financing options, or work on improving your credit score, being proactive about PMI can save you money and streamline your path to homeownership. By weighing your options and consulting with mortgage professionals, you can navigate the complexities of PMI confidently and secure your dream home on your terms.

Questions about PMI and your Mortgage Options? Get in touch with one of our Mortgage Experts today!