Most insurance exists to protect something you care about. Your home. Your health. Your family.
Private mortgage insurance (PMI) is a bit different.
PMI does not protect your house or your finances. It protects the lender. That alone makes it one of the most misunderstood costs when buying a home. But it has a purpose.
For many borrowers, PMI feels like a fixed requirement; something you simply accept if your down payment is not large enough. In reality, it’s more nuanced. Your down payment, loan structure, and mortgage program can all affect whether you need PMI and how long it stays in place.
This article will walk through what PMI is, how loan-to-value ratios affect it, and several strategies that may or may not help you to avoid PMI or reduce its impact. The goal is not to promise outcomes or tell you what to do, but to help you see what may be possible before you commit to a mortgage that includes mortgage insurance.
What Is Private Mortgage Insurance (PMI)?
Private mortgage insurance is about cutting down risk for the lender.
It comes into play if a borrower can no longer make their mortgage payments. If that happens, the home may be sold through foreclosure so the lender can recover what they’re owed. In some cases, though, the sale price doesn’t fully cover the remaining loan balance.
PMI helps the lender absorb that loss and simply reduces the lender’s risk when a loan starts with a smaller down payment.
PMI typically applies to conventional loans when a borrower puts down less than 20% of the home’s purchase price or appraised value, whichever is lower. From the lender’s perspective, a smaller down payment means higher risk. PMI exists to help balance that risk.
At a high level, PMI is tied to a few key factors lenders look at when evaluating risk:
- Down payment size, especially whether it’s below 20%.
- Loan-to-value (LTV) ratio, which reflects how much of the home’s value is being financed.
- Credit profile, including credit score and overall borrowing history.
- Loan type, since PMI typically applies to conventional loans.
From a homeowner’s standpoint, PMI doesn’t build equity, lower your interest rate, or protect your property. It’s simply an added cost tied to how the loan’s structured.
The cost of PMI varies based on several factors, including down payment size, credit score, and loan amount.
On average, PMI can range from about 0.3% to 1.5% of the original loan amount per year. On a $350,000 mortgage, that could mean anywhere from roughly $90 to more than $400 added to your monthly payment.
PMI is most often paid monthly as part of the mortgage payment, though some loans allow for upfront or split-payment options.
While PMI can make homeownership possible sooner, it’s also one of the few mortgage expenses that provides no direct benefit to the borrower. That’s why many buyers take time to explore ways to reduce it or avoid it altogether.
The Relationship Between Loan-To-Value (LTV) and PMI
Before diving into potential strategies on how to avoid PMI, it helps to understand how PMI is triggered in the first place. The key factor is your loan-to-value ratio, often shortened to LTV.
Your LTV compares the amount you are borrowing to the home’s value. Lenders use it as a primary measure of risk.
The basic formula looks like this:
Loan amount ÷ home value = loan-to-value ratio
For example, if you purchase a home for $400,000 and borrow $360,000, your LTV is 90% because you are borrowing 90% of the home’s value.
On a standard conventional loan, an LTV above 80% usually requires PMI. Once your LTV drops to 80% or lower, either through payments or appreciation, PMI may be removed depending on the loan terms.
Understanding this relationship is key because most strategies designed to reduce PMI focus on lowering your LTV, either at the time of purchase or over the life of the loan.
If you want to explore how different down payment amounts affect LTV and would like assistance walking through it, Quontic has specialists ready to help.
5 Strategies That May Help You Avoid Paying Mortgage Insurance
There is no end-all, be-all solution on how to avoid PMI.
Sometimes it’s just unavoidable. Each borrower’s income, savings, credit profile, and goals are different. That said, the following approaches are commonly explored by buyers looking to limit PMI costs.
Make a 20% Down Payment
Putting 20% down is the most straightforward way to avoid PMI on a conventional loan. When your LTV starts at 80% or lower, mortgage insurance is typically not required.
Sometimes that’s easier said than done. For many buyers, especially first-time homeowners, saving so much for a down payment can feel out of reach. On a $400,000 home, a 20% down payment means $80,000 upfront, and that doesn’t even include closing costs.
Still, for those who are able to reach that 20%, the benefit is clear.
You start your loan without PMI, keep your monthly payment lower, and begin building equity more quickly.
Use Gift Funds Toward Your Down Payment
If your family is able to help, gift funds can make a real difference in how much PMI you end up dealing with.
Many conventional loan programs allow buyers to use gifted money toward a down payment, as long as a few guidelines are followed. In other words, if Uncle Bennie’s feeling generous about helping you with your first home, there’s a right way to make that help count.
Gift funds can be especially helpful if you’re close to a lower loan-to-value threshold but not quite there on your own. Even if they don’t get you all the way to a 20% down payment, they can still reduce the amount you’re borrowing. That lower loan amount can mean less PMI each month or help it fall off sooner, which is where the benefit really starts to show.
Like most things in the mortgage process, the details matter. Using gift funds requires proper paperwork, including a signed gift letter confirming the money isn’t a loan. It’s not complicated, but it’s not something you want to improvise either.
Look Into Piggyback Loans
A piggyback loan, often called an 80/10/10 loan, means taking out two mortgages at the same time. It’s not as strange as it sounds, even if it does feel a little like juggling at first.
The first mortgage typically covers 80% of the home’s value. The second loan covers part of what’s left, often another 10%, with the buyer putting down the final 10% in cash. The second loan is usually a traditional second mortgage, though in some cases it may be structured as a home equity line of credit, or HELOC.
Because the primary mortgage stays at or below an 80% loan-to-value ratio, PMI may not be required. That’s the main reason this structure gets attention in the first place.
Of course, two loans mean two payments. In some cases, the combined interest cost can end up being higher than what PMI would’ve been, which can feel like avoiding one expense only to meet another.
Consider Lender-Paid Mortgage Insurance (LPMI)
Lender-paid mortgage insurance sounds appealing right out of the gate. After all, it sounds like the lender’s picking up the tab.
With LPMI, the lender covers the cost of mortgage insurance instead of charging you a separate monthly PMI payment. In exchange, you agree to a slightly higher interest rate on the loan. So rather than seeing PMI listed as its own line item, the cost is baked into the rate itself.
Of course, nothing’s free.
That higher interest rate means you may end up paying more over time, especially if you plan to stay in the home for a while. LPMI can sometimes make sense for buyers who expect to refinance or sell sooner rather than later. For long-term homeowners, the math doesn’t always work out the same way.
The point is understanding how the higher rate compares to the cost of PMI over the life of the loan, so you can choose the option that fits your plans, not just the one that looks simpler on paper.
Choose a Loan Program That Does Not Require PMI
In some cases, avoiding PMI has less to do with how much you put down and more to do with the type of loan you choose. Certain loan programs are structured as a no PMI mortgage, meaning private mortgage insurance simply isn’t part of the deal.
These programs are usually created for specific situations or borrower groups.
USDA loans, for example, are available in certain rural and suburban areas and come with their own eligibility rules and fee structures. Doctor loans are another niche option, often built for medical professionals who may have strong earning potential but limited savings early in their careers.
VA loans are one of the most well-known examples. Available to eligible veterans, active-duty service members, and some surviving spouses, VA loans don’t require private mortgage insurance, even with little or no money down.
That can make a noticeable difference in monthly payments and long-term costs. If you’re a veteran and think this option might be a good fit for you, speaking to a lender that offers VA loans is a perfect way to find out.
The Difference Between PMI and FHA Mortgage Insurance Premium (MIP)
The distinction between PMI and FHA mortgage insurance is subtle but important, especially when comparing long-term costs across loan types.
PMI is often confused with the FHA mortgage insurance premium, or MIP. While both involve insurance tied to a mortgage, they function differently.
PMI applies to conventional loans and can often be canceled once the loan reaches a certain LTV, typically 80%.
FHA loans require MIP regardless of down payment size. In many cases, FHA MIP lasts for the entire life of the loan unless you refinance into a different program.
FHA loans can be helpful for borrowers with lower credit scores or smaller down payments, but the long-term cost structure is different. Understanding whether you are dealing with PMI or MIP is important when comparing loan options.
Bringing It All Together: Making PMI Part of a Bigger Picture
If you’re looking for definitive ways on how to avoid private mortgage insurance, remember there may not be one.
That’s because PMI isn’t about protecting your home or your future. It’s about protecting the lender when a loan starts with a smaller down payment. That doesn’t make it good or bad. It just makes it something worth understanding.
Depending on your financial situation, there may be ways to reduce the amount of PMI you pay or avoid it altogether.
Larger down payments, gift funds, piggyback loans, lender-paid options, or choosing a loan program that doesn’t require PMI can all change how it factors into your mortgage. None of these are guarantees, and none are right for everyone, but knowing they exist gives you more clarity before you commit.
At the end of the day, the goal isn’t to eliminate every extra cost at all costs. It’s to make informed decisions that align with your plans, timeline, and comfort level.
If you’d like help understanding how PMI may or may not apply to your loan, connect with a Quontic mortgage specialist today.