Buying a home is one of the most exciting milestones in life, but it can also come with financial hurdles, especially for first-time buyers who may not have a large down payment saved. If you’re like many 1st time borrowers who don’t have a huge down payment saved up, you might be wondering what options are available and the extra costs associated with them.

What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is a type of insurance required by lenders when a homebuyer puts down less than 20% on a conventional loan. Since lenders take on more risk when a borrower has a smaller down payment, PMI serves as protection in case the borrower is unable to make payments. While PMI provides security for the lender, it does not offer protection for the borrower. Instead, it allows buyers to qualify for a mortgage with a lower down payment, making homeownership more accessible.

PMI is typically paid as part of a borrower’s monthly mortgage payment, but some lenders offer alternative payment options. While it adds to the overall cost of homeownership, PMI can be a valuable tool for first-time buyers who are ready to purchase a home but haven’t had time to save a large down payment.

How Much Do You Need to Put Down to Avoid PMI?

If you want to avoid PMI altogether, you typically need to make a 20% down payment on your home. For example, if you’re purchasing a $300,000 home, you would need $60,000 down to bypass PMI. However, for many first-time buyers, saving this much money can take years. That’s why many opt for a lower down payment and accept PMI as a temporary cost.

There are other ways to avoid PMI, even without putting 20% down. Some lenders offer lender-paid PMI (LPMI), where the lender covers the cost of PMI in exchange for a slightly higher interest rate. Others might offer piggyback loans, where buyers take out a second loan to cover part of their down payment. Understanding your options can help you determine the best approach for your financial situation.

How Much Does PMI Cost?

The cost of PMI varies depending on several factors, but it typically ranges between 0.3% and 1.5% of the loan amount per year. The exact amount is determined by:

• Loan amount – The more you borrow, the higher your PMI costs.
• Down payment size – A higher down payment means lower PMI costs.
• Credit score – A higher credit score can lower your PMI rate.
• Loan type – PMI is often more expensive for adjustable-rate mortgages (ARMs) than fixed-rate loans.

For example, if you take out a $250,000 loan with a 5% down payment and a PMI rate of 0.5%, you would pay $1,250 per year ($104 per month) in PMI. While this is an added expense, it allows buyers to enter the housing market sooner instead of waiting to save a larger down payment.

When Can You Remove PMI?

The good news is that PMI isn’t permanent. Once you reach a loan-to-value (LTV) ratio of 80%, you can request to have PMI removed. This means your mortgage balance must be 80% or less of your home’s original purchase price. If you don’t request removal, PMI will automatically drop off at 78% LTV as long as you’ve made consistent payments.

There are a few ways to reach 80% LTV faster:

• Making extra payments toward your loan principal.
• Home appreciation – if your home’s value increases, you may reach 80% LTV sooner.
• Refinancing if your home has gained enough equity.

If you believe your home value has increased significantly, you may be able to remove PMI early by requesting a new home appraisal. This can be an effective strategy in a rising real estate markets where property values may appreciate over time.

How to Minimize or Avoid PMI Costs

While PMI is an added expense, there are several ways to reduce its impact on your mortgage payments. One of the most effective strategies is saving for a larger down payment, even if you can’t reach the full 20% threshold. Increasing your down payment from 3% to 10% can significantly lower your PMI costs, making your monthly payments more manageable. Additionally, improving your credit score can help reduce PMI rates, as lenders often offer better terms to borrowers with higher credit scores. Exploring alternative loan options can also make a difference—FHA, VA, and USDA loans each have their own mortgage insurance structures, some of which may be more affordable depending on your situation. Another option is looking into down payment assistance programs, as Nevada offers programs designed to help first-time buyers cover their initial costs. By carefully evaluating your financial situation and loan options, you can take steps to minimize PMI expenses and make homeownership more affordable.