Private Mortgage Insurance (PMI) and Making Sure you Avoid It

by Sean Bryant on October 20, 2011

If you are a homeowner and you put down less than 20% when you bought your home there is a pretty good chance you are paying what is called private mortgage insurance or PMI.  This is a monthly fee that is added to your mortgage statement and is typically between one half and one percent of the loan amount.

What is Private Mortgage Insurance (PMI)?

Private Mortgage insurance often allows for homeownership even if you are only have a 0-5% downpayment.  This protects the lender again their default risk.

So you have probably figured out on your own that there is no real benefit to your the borrow.  It only benefits the lender.  So how can you get rid of having to pay PMI?

  • Have your House Appraised – This probably isn’t going to help most of us right now but when housing prices have gone up a considerable amount you can have your house reappraised.  If your loan-to-value ratio falls below the 80% threshold you can request to have PMI terminated.  What this means is that after the appraisal of the houses worth it is found that you have over 20% equity.
  • Remodel – You can decide that you want to make some upgrades or add onto your house.  By doing this you will also increase the value of your home.  Just like above if this drops you below the 80% loan-to-value number you can request ti have your PMI canceled.

  • Pay Down Your Mortgage – This might be the less likely thing you can afford to do, but if you can than try paying down your mortgage so that you drop below the 80% loan-to-value amount.
  • Piggypback Mortgage – You might have also heard this talked about as the 80-10-10 mortgage.  This is established by taking out a second mortgage on your house.  The 80 stands for an 80% lien that is put on the home. Then the first 10 is for 10% downpayment.  The second 10 is for a 10% second mortgage.  This will allow you to get rid of the PMI and add equity to your home.

When all said and done the best option for you is to put down the full 20% when you take out your mortgage.  On the plus side by have private mortgage insurance it has allowed more people to be able to become home owners.  My only advice is that you should just try and put as much down as you possibly can.  This will allow you to be able to get rid of PMI that much quicker.

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Sean Bryant

Sean Bryant created in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and his wife are avid world travelers. He enjoys spending time with his two kids and dog Charlie.
Scott Sery October 26, 2011 at 11:21 am

I would add that the PMI is required by law to drop off when the loan to value hits 78% of the appraised value at the time of sale. And keep in mind it often costs around $500 to have your home appraised, so there is no point to have it re-appraised if you are close to the 78% mark anyways.

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