Private Mortgage Insurance: A Guide To PMI

How you can avoid PMI depends on what type you have:

  • Borrower-paid private mortgage insurance, which you’ll pay as part of your mortgage payment.

  • Lender-paid private mortgage insurance, which your lender will pay upfront when you close, and you’ll pay back by accepting a higher interest rate.

Let’s review how each type works in more detail, and what steps you can take to avoid paying either one.

How To Avoid Borrower-Paid PMI

Borrower-paid PMI is the most common type of PMI. BPMI adds an insurance premium to your regular mortgage payment.

You can avoid BPMI altogether with a down payment of at least 20%, or you can request to remove it when you reach 20% equity in your home. Once you reach 22%, BPMI is often removed automatically.

While it’s possible to avoid PMI by taking out a different type of loan, FHA and USDA loans have their own mortgage insurance equivalent in the form of mortgage insurance premiums and guarantee fees, respectively. Additionally, these fees are typically around for the life of the loan.

The lone exception involves FHA loans with a down payment or equity amount of 10% or more, in which case you would pay MIP for 11 years. Otherwise, these premiums are around until you pay off the house, sell it or refinance.

The only loan without mortgage insurance is the VA loan. Instead of mortgage insurance, VA loans have a one-time funding fee that’s either paid at closing or built into the loan amount. The VA funding fee may also be referred to as VA loan mortgage insurance.

The size of the funding fee varies according to the amount of your down payment or equity and whether it’s a first-time or subsequent use. The funding fee can be anywhere between 1.4 – 3.6% of the loan amount. On a VA Streamline, also known as an Interest Rate Reduction Refinance Loan, the funding fee is always 0.5%.

It’s important to note that you don’t have to pay this funding fee if you receive VA disability or are a qualified surviving spouse of someone who was killed in action or passed as a result of a service-connected disability.

One other option people look at to avoid the PMI associated with a conventional loan is a piggyback loan. Here’s how this works: You make a down payment of around 10% or more and a second mortgage, often in the form of a home equity line of credit, is taken out to cover the additional amount needed to get you to 20% equity on your primary loan. (Rocket Mortgage® doesn’t offer HELOCs at this time.)

Although a HELOC can help avoid the need for PMI, you’re still making payments on a second mortgage. Not only will you have two payments, but the rate on the second mortgage will be higher because your primary mortgage gets paid first if you default. Given that, it’s important to do the math and determine whether you’re saving money or if it just makes sense to make the PMI payments.

How To Avoid Lender-Paid PMI

Another option is for your lender to pay your mortgage insurance premiums as a lump sum when you close the loan. In exchange, you’ll accept a higher interest rate. You may also have the option to pay your entire PMI yourself at closing, which would not require a higher interest rate.

Depending on the mortgage insurance rates at the time, this may be cheaper than BPMI, but keep in mind that it’s impossible to “cancel” LPMI because your payments are made as a lump sum upfront. If you wanted to lower your mortgage payments, you’d have to refinance to a lower interest rate, instead of removing mortgage insurance.

There’s no way to avoid paying for LPMI in some way if you have less than a 20% down payment. You can go with BPMI to avoid the higher rate, but you still end up paying it on a monthly basis until you reach at least 20% equity. In that case, you’re back to the original amount from the BPMI scenario.