Avoiding PMI: Strategies Beyond 20% Down Payments

When you buy a home with less than a 20% down payment, most lenders require you to pay Private Mortgage Insurance (PMI). This extra cost can add hundreds of dollars to your monthly mortgage bill, but the good news is there are ways to avoid PMI without saving up a massive lump sum. By exploring options like lender-paid mortgage insurance and other PMI alternatives, you can keep more money in your pocket while still securing your dream home.

Understanding PMI and Why Lenders Require It

PMI is designed to protect lenders, not borrowers, in case you default on your home loan. While it doesn’t benefit you directly, it’s often a necessity if your down payment is under 20%. PMI rates vary depending on your credit score, loan type, and loan-to-value (LTV) ratio, but typically range from 0.3% to 1.5% of the original loan amount annually.

Why Avoiding PMI Makes Financial Sense

PMI is essentially a recurring expense with no equity benefits. Let’s say you purchase a $300,000 home with a 10% down payment. If your PMI rate is 1%, that’s $2,700 per year (or $225 per month) — money that could otherwise go toward paying off your mortgage faster or investing elsewhere.

By avoiding PMI, you lower your monthly payment and reduce your long-term housing costs.

Strategy 1: Lender-Paid Mortgage Insurance (LPMI)

Lender-paid mortgage insurance is an arrangement where the lender covers the PMI cost upfront in exchange for a slightly higher interest rate. This option works well if you plan to keep the home long enough for the interest rate trade-off to be worth it.

Pros:

• No separate PMI payment

• Potentially lower monthly costs than borrower-paid PMI

• Simplifies your mortgage payment

Cons:

• Interest rate is permanently higher

• Not ideal if you plan to refinance soon

Strategy 2: Piggyback Loans (80-10-10 Strategy)

A piggyback loan lets you take out a second loan to cover part of your down payment. For example:

• First mortgage: 80% of the home price

• Second mortgage: 10% of the home price

• Your down payment: 10%

By keeping the first mortgage at 80%, you avoid PMI entirely.

Things to consider: Second mortgages often have higher interest rates, so compare costs carefully.

Strategy 3: VA Loans (For Eligible Borrowers)

If you’re a veteran, active-duty service member, or eligible spouse, a VA loan offers 0% down payment with no PMI. Instead, you’ll pay a one-time funding fee (which can be financed into the loan), making it one of the most powerful ways to avoid PMI.

Strategy 4: Higher Down Payment via Gifts or Grants

You don’t have to save the entire down payment yourself.
Options include:

• Down payment assistance programs from state or local governments

• Employer-sponsored housing benefits

• Gift funds from family members

These can help you reach the 20% threshold without delaying your purchase.

Strategy 5: Consider USDA Loans (For Rural Properties)

USDA loans allow for zero down payment and don’t require traditional PMI. Instead, they have a lower annual guarantee fee, which is generally less expensive than PMI. The property must be in a USDA-eligible rural or suburban area, and income limits apply.

Strategy 6: Rapid Equity Build-Up

If you must start with PMI, you can aim to pay down your mortgage faster. Once you reach 20% equity, you can request PMI cancellation. Using tax refunds, bonuses, or extra payments toward principal can help you hit this mark sooner.

Comparing the Costs of PMI Alternatives