Saving Enough for a Down Payment? How Private Mortgage Insurance (PMI) Can Help

Saving Enough for a Down Payment? How Private Mortgage Insurance (PMI) Can Help

Saving enough money for a sizeable down payment may be stopping many Americans from getting onto the property ladder. But private mortgage insurance (PMI) may help you secure a loan you wouldn’t conventionally qualify for.

What Is Private Mortgage Insurance?

Most lenders require home buyers to put down about 20% of their home’s purchase price to qualify for a conventional (nongovernmental) loan. This can be a hefty commitment for consumers, especially first-time buyers. In fact, 61% of first-time buyers made a down payment of 6% or less, according to the National Association of Realtors.

PMI allows borrowers to qualify for a conventional loan even if they put down 5% up to 19.99%. It’s typically arranged by the lender and issued by private insurance companies. While you’re paying for the insurance, the coverage isn’t for you—it protects lenders if you default on your loan.

How Much Does PMI Cost?

PMI costs vary based on factors like:

• Down payment size
• Mortgage amount
• Credit score
• Loan-to-value ratio

Most lenders quote an annual range of 0.25% to 2.25% of your loan balance. For a $200,000 mortgage, PMI could cost $1,100–$4,500 annually ($92–$375 monthly).

Tip: Improve your credit score, opt for a smaller mortgage, or increase your down payment to lower PMI rates.

How Do PMI Payments Work?

PMI payments are structured in three ways:

• Single-premium mortgage insurance: Paid as a lump sum at closing.
• Borrower-paid mortgage insurance: Rolled into monthly mortgage payments.
• Hybrid option: Partial upfront payment with monthly installments.

Discuss payment options with your lender to determine the best fit for your finances.

When Do PMI Payments Stop?

PMI typically terminates when you reach 20% equity in your home. Under the Homeowners Protection Act, lenders must automatically cancel PMI once your loan-to-value ratio hits 78%.

You can also request cancellation earlier if your home’s value appreciates, provided you have a solid payment history and no liens.

Alternatives to PMI

If PMI isn’t for you, consider:

• 20% down payment: Avoid PMI by meeting the traditional threshold.
• Low down payment loans: Programs like Quicken Loans’ PMI Advantage or Bank of America’s Affordable Loan Solution offer alternatives with minimal or reduced PMI.
• Government-backed loans: VA loans (for veterans) require no PMI, while FHA loans offer lower mortgage insurance rates.

Is PMI Worth It?

PMI can be a valuable tool for homebuyers who can’t wait to save 20%. Weigh the costs against potential home appreciation and personal goals like family stability or long-term investment.

Ultimately, crunch the numbers on PMI, taxes, and interest to decide if it’s your gateway to homeownership.