What Is PMI and How Can I Avoid It?

Home Buying By Noah - January 11, 2022

One of the first decisions you make about your home is the size of your down payment. In today’s hyper-competitive real estate market, putting up a substantial down payment can determine whether your bid is accepted at all. A 20% down payment has long been the gold standard, but for many homeowners, this sum isn’t necessarily the best fit for their financial plans. Even homeowners who technically can afford 20% or more down may choose not to put all of those funds into the house, reserving some cash for other goals instead.

If you can’t or choose not to meet the 20% down benchmark, you’ll likely hear three letters over and over again: PMI. Learn everything you need to know about this extra home payment, from exactly what it is to how to get rid of it sooner, and a new strategy you may not know that can help you avoid PMI while keeping more cash on hand for other plans that matter to you.

What is PMI?

Private mortgage insurance, or PMI, is a type of mortgage insurance homeowners are often required to have if their down payment is less than 20% of the purchase price of the property. PMI on home loans protects the lender in case the homeowner doesn’t keep up with mortgage payments, but the homeowner is responsible for paying the cost of PMI. In most cases, you pay PMI as a monthly premium that’s added to your mortgage payment. Sometimes, homeowners pay a one-time, up-front PMI premium (which may not be refundable if you move or refinance), or pay via a combination of up-front and monthly premiums.

It’s tough, but not impossible, to avoid PMI when buying a house with less than a 20% down payment. Some types of loans, such as FHA loans, set different rules about down payment and loan terms and may not require PMI. PMI typically costs up to 1.5% of the home value annually, so many homeowners hope to be rid of this extra cost as soon as possible.

Pros and Cons of PMI

Figuring out the right timing to buy a home can be a delicate equation. Taking advantage of a favorable market and saving up the full down payment you had in mind aren’t always both possible. Consider the pros and cons carefully to decide what strategy is best for you.

PMI pros

PMI exists to protect the lender, not you, so it can be hard to see much of an upside at first. The main benefit of PMI to a homeowner is that being open to PMI can keep more loan options on the table with a lower down payment. Saving a 20% or larger down payment can keep you away from PMI, but also from a home that fits your family. Paying a lower down payment can help you reserve cash you might need for an emergency fund or other important expenses. If you’ve found a house that ticks the boxes in your wishlist, and a conventional loan is your best option, PMI may feel more than worth it for the right home at the right price in the right neighborhood.

PMI cons

The main downside of PMI is that it’s another cost on an already expensive purchase. An extra $100 or more on your monthly mortgage can translate to skipping an evening out, or taking longer to pay down other debts. PMI can also take years to get rid of, since you need to reach 78-80% of loan-to-value ratio (LTV) on your home first.

Can I Cancel PMI If My Home Value Increases?

At one time, homeowners had little recourse if a lender refused to remove PMI from their loan, even after they reached 20% equity. The Homeowners Protection Act (HPA) requires that lenders cancel PMI once you reach 78% LTV. Certain mortgages also require that PMI not be mandatory beyond the midpoint of the amortization schedule of the loan, even if the homeowner doesn’t have 20% equity. In either case, there may be exceptions to the PMI cancellation requirement if you’re not current on your loan.

3 Ways to remove PMI

  1. Wait for automatic termination of PMI: Under the HPA, the lender must cancel PMI when you reach 78% LTV, if you’re current on the loan. You can contact your lender to find out when this date is.
  2. Request PMI cancellation: When you reach 20% equity, or 80% LTV, you can contact your lender to request that they end PMI. If you don’t know the date, ask your lender for the amortization schedule so you can look it up.
  3. Consider paying for a home appraisal: Real estate values soared in many parts of the country in 2020 or 2021. If you suspect your home has appreciated value quickly, that may speed you toward the 20% equity mark. It might be worth the cost of an appraisal to have a formal document to demonstrate your home value to your lender and end PMI earlier than you may have expected.

3 Ways to Stop Paying PMI Early

If you’re planning to buy a home soon, or you’ve recently purchased a home with a loan that required PMI, you may be wondering how to stop paying PMI early. 

  1. Make extra mortgage payments: If you have extra cash (e.g., from a tax refund or a month with three paychecks), put it toward your mortgage. Follow your lender’s instructions to make sure the extra payment goes toward principal to help build equity.
  2. Refinance if possible: Refinancing a home loan can make sense for homeowners who are likely to find a lower mortgage rate than their initial loan, and who have owned their home long enough for it to appreciate. New homeowners and homeowners who got a mortgage at low interest rates (like 2020 or 2021 rates, which are on the low end of historic averages) may not find this to be a good option until they’ve owned their home for at least a few years.
  3. Raise your home value: Updating and renovating your home can add value (and equity). If you feel you’ve made substantial improvements to your home, especially if you’ve added features like an additional bathroom or a guest house, consider a new appraisal to reflect your home’s current value.

A new way to drop PMI without refinancing

A major downside to all three of the above strategies to get rid of PMI early: They’re all costly. The whole reason you’re not paying 20% down in the first place is most likely because you have more important priorities for the money than putting it all into building home equity. So, is there any way to stop or avoid paying PMI without tying up more of your wealth than you planned?

If you're planning to buy a home but don't have enough for a 20% down payment, Noah's new Down Payment Assistance Program can help. Here’s how it works.

You can get pre-qualified for Down Payment Assistance before you even make an offer on your new home. Noah provides up to 15% of the purchase price for homes ranging from $200,000- $3,500,000 in exchange for a share of future value of the home. Knowing you’re qualified (and have flexibility with your cash) can help you feel well positioned to make a competitive offer of 20% or more of the purchase price. In a strong seller’s market, that can be a factor that gets you the winning bid. It also means you avoid adding PMI payments to your new mortgage.

Down Payment Assistance means you can save on your monthly mortgage payments. Use the money to work on home remodeling projects, replenish cash reserves, or diversify your wealth — it’s completely up to you. You won’t pay PMI, and you won’t add a monthly payment to Noah, either. We partner on a share of your home’s appreciation, and you don’t owe anything for 10 years.

Want to skip PMI and keep more cash? Check if your home is a good fit for Down Payment Assistance.

PMI payments shouldn’t hold you back from getting your dream home. They also don’t have to be a frustrating addition to your mortgage balance for longer than necessary. Knowing when PMI is worth it, and how to avoid paying more than you need to, helps you create the smartest financial plan for your home.