What is PMI & How You Can Avoid Paying it

first-time homebuying couple discussing what private mortgage insurance (PMI) is and ways to avoid it with their lender

PMI — it sounds like one of those three letter acronyms that you’ve heard in passing, but don’t exactly know what it means.

But if you’re mortgage shopping, it’s important to understand exactly what PMI is and why you should give serious consideration to avoiding it.

You don’t want to commit to a mortgage loan without having comprehensive knowledge of all of the possible costs and fees associated with it, and understanding PMI is a large part of seeing the whole picture.

So, What Is PMI?

PMI, or private mortgage insurance, is a protective fee assessed by a lender if they determine that your loan may be risky and susceptible to defaulting.

This is typically imposed if you cannot put down the usual down payment (20% of the total price of the home) up front.

On average, the fee that is associated with PMI is 0.5% to 1% of the total loan amount yearly.

While this may seem like a relatively small amount on a $180,000 home loan, private mortgage insurance would stack an additional $900 to $1,800 onto your mortgage payment annually.

If you get stuck with a PMI payment, you are typically obligated to pay that additional annual amount for over three-quarters of the loan life, since PMI isn’t terminated until 78% of the mortgage is paid off.

In other words, once you’re committed to a PMI payment, you’re often stuck with it for years — and sometimes decades.

How Can I Avoid PMI?

The most obvious way to avoid PMI is to find a cheaper home that you can afford with a 20% down payment.

However, that is not always the desired or realistic solution for many reasons.

Another common, effective way to avoid PMI is to take out a “piggyback loan.”

A piggyback loan is a smaller, higher interest loan that covers the remainder of the down payment on your prospective home. This allows you to pay the lender’s desired down payment, and lets you avoid getting stuck with PMI.

It might seem illogical to replace a relatively low-fee mortgage insurance payment with a high interest loan, but a piggyback loan is short-term and the interest on the loan is almost always tax deductible.

Even at a high interest rate, the total payments made on a short, smaller loan are unlikely to amount to the total spent on PMI year after year.

This makes piggyback mortgage loans a desirable alternative to PMI if you are not in a financial position to put down a full down payment on your own.

HRCCU Mortgages with Up to 95% Financing & No PMI

If neither of these options seem ideal, there is a third option: HRCCU offers a special deal on our mortgages that include up to 95% financing with no PMI.

If you take out a mortgage with us, you can avoid the stress of PMI or a piggyback loan while still benefiting from the fair and competitive rates we pride ourselves on.

If you are considering buying a home, check out our related blogs, “5 Steps to Mortgage Approval” and “3 Essential Tips For First-Time Home Buyers.”

About The Author

Cathy Carpenter

Cathy Carpenter is the Senior Vice President of Lending at HRCCU and has over four decades of experience in lending. Cathy started her career as a teller at HRCCU and worked her way up the ranks, allowing her to work closely with the community to assist with obtaining mortgages, auto loans, and more.

filed under: Mortgage