How much does PMI cost?
PMI costs vary, but they typically range from 0.5% to 1% of the loan amount annually. So, for a $200,000 mortgage, your PMI could be $1,000 to $2,000 per year. That’s in addition to your mortgage payment, homeowner’s insurance, and property taxes.
If you have a low credit score or a high loan-to-value ratio, your costs could be even higher. Your loan-to-value ratio is the amount of your loan when compared to the value of your home. If you make a 5% down payment, your loan-to-value ratio is 95%, and you’ll likely have a higher PMI payment than someone who makes a 10% down payment.
»Learn more: Ready to see how much PMI could add to your monthly mortgage payment? Use the PMI Calculator to crunch the numbers in seconds and get a clearer picture of what you can comfortably afford.
How can you avoid PMI?
The simplest way to avoid PMI is to make a 20% or higher down payment. That isn’t always realistic, though. Some other options include:
Shop around: Some lenders may offer a conventional loan without PMI, even if your down payment is less than 20%. Review these offers carefully, though, as the interest rate may be higher than a mortgage with PMI. You could end up paying even more in total costs just to avoid PMI.
Consider other types of loans: For example, FHA loans and VA loans don’t have PMI. They do have other fees, though. FHA loans require borrowers to pay upfront and ongoing mortgage insurance. Even with the insurance costs, an FHA loan may be a better deal for borrowers with lower credit scores than a conventional loan with PMI.
VA loans don’t have PMI or mortgage insurance, but there’s a funding fee, which varies depending on the amount of your down payment. And, of course, these loans are only available to U.S. veterans
Use a lender-paid mortgage insurance (LPMI) option: With LPMI, the lender pays the cost of mortgage insurance on your behalf, so you don’t see a separate PMI charge on your monthly bill. In exchange, your mortgage interest rate is set slightly higher to compensate for that expense.
This can make your monthly payment look simpler and sometimes even lower than paying PMI separately. However, unlike borrower-paid PMI, you typically can’t cancel LPMI once your home equity grows, so you may pay more over the life of the loan.
Seek out special loan programs: Some lenders and government-backed programs are designed to help buyers avoid PMI even with a smaller down payment. For example, certain state housing agencies or first-time buyer initiatives allow low down payments while offering alternatives to traditional PMI.
These programs may use different forms of insurance or subsidies to reduce lender risk without passing PMI costs directly to the borrower. It’s worth researching what’s available in your area, since eligibility often depends on income, location, or whether you’re a first-time buyer.
Take advantage of down payment assistance programs: Some state and local programs offer help with your down payment through grants, low-interest loans, or even forgivable loans. This extra boost can get you closer to the 20% mark, which can eliminate PMI altogether.
Even if it doesn’t cover the full amount, it can still shrink your loan balance and lower the PMI cost. Check what’s available in your area. Eligibility often depends on income, first-time buyer status, or where you’re buying.
