How to Avoid Private Mortgage Insurance


Buying a house no longer requires a 20% down payment, but some banks will require private mortgage insurance (PMI) if you purchase with less money. PMI is a type of insurance that minimizes your lender’s risk and protects the bank in case you default. You purchase the policy, but your lender is the beneficiary. Annual premiums are typically between 0.5% and 1% of the loan balance and paid monthly as part of the mortgage payment. Since PMI can increase your monthly housing cost, you may look for ways to avoid this expense. Giving your lender a 20% down payment is the obvious solution, but like so many buyers, you may not have this type of cash lying around. Fortunately, there are ways to buy a house without the added expense of private mortgage insurance.

Piggyback Mortgage

Piggyback mortgage loans became practically extinct after the 2008 housing bust, but they’re slowly making a comeback.  If you don’t have a 20% down payment, yet you want to avoid private mortgage insurance, these loans might be an option depending on your lender. With a piggyback mortgage, you’ll take out a first mortgage for 80% of the purchase price, a second mortgage for 10% of the purchase price, and then you’ll give the bank a 10% down payment from your own funds.

Special Mortgage Financing

Fannie Mae and Freddie Mac are two of the biggest buyers of conventional mortgage loans, and according to their home loan guidelines, a borrower must pay PMI if purchasing a property with less than 20% down. Most banks don’t have the capacity to retain every home loan they originate, so they must sell their mortgages. Since Fannie Mae and Freddie Mac only purchase loans that comply with their guidelines, many lenders require PMI. Some lenders, however, do not sell their mortgage loans. These banks have the flexibility to offer specialized financing, in which case they may waive PMI if you have excellent credit, or you might avoid PMI by paying a slightly higher interest rate. Special financing programs are more common with community banks and smaller mortgage lenders.

Apply for a VA Home Loan

If you’re active-duty military or a veteran, you may qualify for a VA home loan. These loans, which are backed by the Department of Veteran Affairs, make it easier for military personnel to buy homes. Not only can you get a VA home loan with no down payment, you don’t have to pay private mortgage insurance with these loans.

Make Higher Mortgage Payments

Even if you start off paying PMI, you can eliminate this expense and reduce your monthly housing cost. Mortgage lenders are required to cancel PMI once your loan-to-value ratio drops below 78%. The sooner you pay down your mortgage balance, the quicker you can get rid of PMI. You can pay down your mortgage faster by making larger mortgage payments every month, or by making an extra principal payment every year.