How Much Can You Save by Avoiding PMI?
Summary: No homeowner enjoys paying for private mortgage insurance (PMI), which protects your lender in case you default. But how much can you save by coming up with a down payment that is large enough to eliminate PMI from your loan? Click through for the details.
Your lender is taking a risk by loaning you hundreds of thousands of dollars in mortgage money to buy your home. If you stop making your mortgage payments, PMI kicks in and pays your lender. PMI is a financial safety net for your lender.
You’ll pay a portion of your yearly PMI cost with every mortgage payment. This annual cost will vary depending on the size of your mortgage. Most lenders charge from 0.46% to 1.5% of your original loan amount each year.
For a $350,000 mortgage, your PMI premium would range from $1,610 to $5,250 each year or about $134 to $437 each month.
You can avoid paying for PMI, though, if you come up with a down payment that is equal to at least 20% of your home’s purchase price. For a home with a $370,000 sales price, that down payment would be $74,000 — a lot of money.
If you can swing that 20% down payment, though, you can save thousands of dollars in PMI payments.
PMI doesn’t last forever
Even if you can’t afford a down payment of 20%, you won’t have to pay PMI for the full term of your loan. There are two ways that PMI payments can end.
- Automatic PMI cancellation. Your lender will automatically cancel your PMI payments when the amount you owe on your mortgage reaches 78% of the value of your home when you purchased it. Say you purchased your home for $300,000. When your mortgage balance reaches $234,000, your loan-to-value ratio will now be 78%, and your lender will automatically cancel your PMI, eliminating those monthly payments and saving you money.
- Request PMI cancellation. You can ask your lender to cancel PMI when your loan-to-value ratio reaches 80% or lower. This means you now have at least 20% equity in your home. For example, if you purchased your home for $300,000, you can request PMI cancellation when your mortgage balance is $240,000 or lower. You might have to pay for an appraisal of your home if you request PMI cancellation.
How much in PMI can that 20% down payment save you?
How much you’ll save in PMI costs by coming up with a 20% down payment varies. But it takes the average homeowner paying off a 30-year fixed-rate loan about 11 years to reach a 78% loan-to-value ratio.
Say you pay $2,300 a year in PMI. If it takes you 11 years to reach a loan-to-value ratio of 78%, you’ll pay $27,600 total for this insurance before your lender automatically cancels it. That’s a lot of money to save by coming up with that 20% down payment when you first purchase your home.
Explore the piggyback loophole
Many are unaware of a special technique that allows homebuyers to avoid PMI payments even when they can’t come up with a 20% down payment.
You will apply for and get two mortgages. The first mortgage is for 80% of the home’s cost. The second (“piggybacked”) mortgage is for 10% of the home’s costs, and then you put down the final 10% in cash as your down payment. This scenario will allow you to avoid PMI payments.
Keep in mind that these “piggyback” mortgages are not available to all borrowers in all circumstances. Also, although you save on PMI, the second mortgage may come with a higher interest rate. It’s worth exploring a piggyback mortgage, but be sure to know all the provisions.
Even if neither a 20% down payment nor a piggyback mortgage is possible for you, don’t despair. PMI costs are not forever, and owning a home allows you to build wealth in the form of equity. Don’t pass on that homeownership opportunity just because you don’t want to pay for PMI.
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