Mortgage Insurance
The Cost of a Smaller Down Payment
If you put down less than 20% of your home's value, lenders generally require Private Mortgage Insurance (PMI). While you pay the bill, this insurance actually protects the lender in case you default on the loan.
The Math: How Much Does PMI Cost?
The cost of PMI usually hovers around 0.5% of the total loan amount per year. While it's paid by you, it’s usually tacked onto your monthly mortgage statement.
Example: On a $150,000 home with 10% down:
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Your loan amount is $135,000.
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$135,000 x 0.5% = $675 per year.
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Your monthly PMI cost = $56.25.
Two Strategies to Avoid (or Bypass) PMI
You don't always have to pay a monthly insurance premium. Depending on your financial strategy, one of these "workarounds" might save you money:
1. The "Lender-Paid" Option (Higher Interest)
Some lenders will waive the PMI requirement if you agree to a slightly higher interest rate (usually 0.75% to 1.0% higher).
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The Benefit: Mortgage interest is often tax-deductible, whereas PMI traditionally isn't.
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The Catch: You’ll be paying that higher rate for the entire life of the loan, even after you’ve built up 20% equity.
2. The "80-10-10" Strategy (Piggyback Loan)
This is a popular way to "cheat" the 20% rule. Instead of one big loan, you take out two:
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First Mortgage: 80% of the home price (No PMI required!).
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Second Mortgage: 10% of the home price (Higher interest, but smaller amount).
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Down Payment: The final 10% in cash.
The Comparison: On a $150,000 home, the 80-10-10 plan can be roughly $35 cheaper per month than a single loan with PMI. Plus, the interest on that second loan is typically tax-deductible!
When Does PMI Go Away?
The best thing about PMI is that it isn't permanent. Once your loan balance drops to 80% of the original value of the home, you can usually request to have it cancelled. Once it hits 78%, the lender is legally required to remove it automatically.