Understanding Private Mortgage Insurance (PMI) and How to Avoid It"

Understanding Private Mortgage Insurance (PMI) and How to Avoid It
By Allen Deaver – Asset Realty

If you’re buying a home, you may have heard the term Private Mortgage Insurance, or PMI. For many buyers, especially first-timers, it can be a bit of a mystery—and an unexpected added cost. Let’s break it down so you know what it is, why it exists, and how you might be able to avoid it altogether.

 
What is PMI?

PMI is an insurance policy that protects your lender—not you—in case you stop making mortgage payments. Lenders require it when you have less than 20% equity in your home at the time of purchase. The idea is simple: the less you put down, the higher the lender’s risk, so PMI helps them offset that risk.

 
How Much Does PMI Cost?

PMI typically ranges from 0.3% to 1.5% of your loan amount per year, depending on factors like your down payment, credit score, and loan type. For example, on a $300,000 loan, you might be paying an extra $75–$375 per month—and that money doesn’t go toward your mortgage balance.

 
When Does PMI Go Away?

PMI isn’t forever. Once your home reaches 20% equity, you can typically request that your lender remove it. By law, most lenders must automatically cancel PMI when you hit 22% equity—based on your original purchase price—not counting market appreciation.

 
One way to Avoid PMI from the Start

Make a 20% Down Payment
The most straightforward way to skip PMI is to put down 20% of the home’s value at closing.
Use a Piggyback Loan
This involves taking out a smaller second mortgage to cover part of the down payment, such as an 80-10-10 loan (80% first mortgage, 10% second mortgage, 10% down).

Negotiate with Your Lender

In certain situations, a strong credit profile and stable income can help you secure a loan without PMI, even with a lower down payment.
 

Why Avoiding PMI Matters

Avoiding PMI means more of your monthly payment goes toward building equity in your home rather than covering insurance premiums. That can save you thousands of dollars over the life of your loan.

 
Thinking About Buying a Home in Central Texas?

Call Allen Deaver with Asset Realty to guide you through your financing options and to help you avoid unnecessary costs like PMI