Private Mortgage Insurance (PMI) is a type of insurance that lenders typically require when home buyers make a Down Payment of less than 20% of the home’s purchase price. PMI protects the lender in case the Borrower defaults on the loan.

Why is PMI Necessary?

PMI is necessary for lenders to mitigate the risk of lending to buyers with smaller down payments. It allows borrowers to access mortgage financing with a lower initial Down Payment, making homeownership more attainable for many.

How Can You Avoid Paying PMI?

You can avoid paying PMI by:

• Making a Down Payment of at Least 20%: When you put down 20% or more of the home’s purchase price, lenders generally do not require PMI.
• Opting for a Piggyback Loan: Also known as an 80-10-10 or 80-15-5 loan, this involves taking out two mortgages simultaneously – one for 80% of the home’s value and another for 10% or 15%, thus avoiding PMI with the larger loan.
• Using Lender-Paid Mortgage Insurance (LPMI): In this scenario, the lender pays for the PMI in exchange for a higher Interest Rate on the loan, which may be deductible for tax purposes depending on your financial situation.

Understanding PMI and its alternatives empowers you to make informed decisions when financing your home purchase. By aiming for a 20% Down Payment or exploring alternative loan structures, you can potentially save on PMI costs and optimize your mortgage terms.