Mortgage Loans with No Mortgage Insurance: How to Avoid PMI and Save Money

Getting a mortgage to buy a home is an exciting step, but it can also be intimidating, especially when it comes to understanding all the extra fees and costs involved. One of those additional expenses that often catches borrowers by surprise is private mortgage insurance, more commonly referred to as PMI.

PMI is an insurance policy that protects the lender, not you as the borrower, in case you stop making payments on your mortgage It’s typically required if you make a down payment of less than 20% of the home’s purchase price. This extra monthly cost can really add up over the life of your loan, so you probably want to avoid it if possible

The good news is that there are ways to get a mortgage loan with no PMI, even if you don’t have a 20% down payment saved up. In this article, we’ll explain what PMI is, how much it costs, and most importantly, the different methods you can use to get a mortgage with no mortgage insurance.

What is Private Mortgage Insurance (PMI)?

Private mortgage insurance or PMI is an insurance policy that lenders require from most borrowers who get a mortgage with less than 20% down. It protects the lender in case the borrower defaults on the loan or stops making payments.

PMI allows buyers with less cash upfront to still qualify for home financing, but it comes at an added cost which is paid monthly along with the mortgage payment. The PMI premiums add several hundred dollars or more to your monthly housing costs.

On a $200,000 home purchase with 10% down, the PMI could be around $100 per month. Over a 30-year mortgage, that adds up to over $36,000 in extra PMI payments. So you can see why avoiding PMI can result in significant savings.

How Much Does PMI Cost?

The exact PMI rate depends on several factors

• Your down payment amount – The lower the down payment, the higher the PMI premium since it represents greater risk to the lender. With less than 5% down, expect PMI around 1.15% of the loan balance per year.

• Your credit score – Borrowers with higher credit scores usually get lower PMI rates. Those with scores below 620 may pay 1% or more.

• Loan type – Government-backed FHA loans actually charge mortgage insurance premiums (MIP) instead of PMI. And FHA MIP tends to be more expensive than PMI on conventional loans.

• Loan term – Shorter loan terms mean paying PMI for fewer years, reducing the overall cost. PMI on a 15-year mortgage costs less than on a 30-year loan.

On a $200,000 loan with 10% down and a 740 credit score, you can expect to pay around 0.5% of the loan amount for PMI, or $83 per month. Over 30 years, that’s almost $30,000 extra paid in mortgage insurance premiums.

How to Avoid PMI on a Mortgage

Now that you understand why avoiding PMI can save you thousands over the life of your home loan, let’s look at some strategies to get a mortgage with no mortgage insurance:

• Make a 20% down payment – This is the simplest way. All lenders waive PMI if you put down 20% or more upfront since it greatly reduces their risk.

• Take out a piggyback HELOC – Also called an 80/10/10 loan, this combines a first mortgage for 80% of the value with a home equity line of credit for 10%, allowing you to avoid PMI with just 10% down.

• Look for lender-paid PMI – Some lenders will pay the PMI on your behalf in exchange for a slightly higher interest rate on the mortgage loan.

• Find special mortgage programs – Certain lenders offer low down payment conventional loans with no PMI through special programs like doctor and teacher mortgages.

• Get down payment assistance – Local and state programs providing grants and loans for down payments can potentially help you reach 20% down and skip PMI.

• Use a VA or USDA loan – These government-backed loans often waive PMI requirements so veterans and rural borrowers can purchase with no down payment.

• Buy a lower-priced home – The lower the purchase price, the easier it is to hit that 20% down payment threshold and avoid mortgage insurance.

• Pay for single-premium PMI – Paying PMI premiums for the entire loan term upfront avoids monthly payments, but increases your closing costs.

• Refinance once you have 20% equity – After a few years of home price appreciation and mortgage payments, you may be able to refinance and get rid of PMI.

As you can see, it is possible to get a mortgage loan with no PMI insurance even if you can’t make a 20% down payment. You just need to understand the options and shop around with different lenders. Veterans especially have fantastic alternatives like the VA home loan that offers no PMI with zero down.

Now let’s look at some of these methods to avoid mortgage insurance in more detail…

1. Make a 20% Down Payment

The most straightforward way to avoid PMI on your home purchase is simply to make a down payment of at least 20% of the home’s purchase price. This is the strategy that eliminates mortgage insurance automatically on any type of loan.

With 20% down, the loan balance represents just 80% of the total value, meaning the lender feels sufficiently protected even if you were to default. Their risk is low enough that they won’t require the extra monthly premiums.

On a $200,000 home, a 20% down payment would be $40,000. While that may seem like a lot, it could be achievable by saving diligently for a few years, getting help from family for part of the down payment, or even tapping into your 401(k) if permitted.

Just keep in mind that the 20% down rule applies to the home’s purchase price, not its appraised value. And the larger the down payment, the less you’ll pay in interest over the life of the loan.

2. Use a Piggyback HELOC as Your Second Mortgage

One way to avoid private mortgage insurance with less than 20% down is to take out two simultaneous loans:

• An 80% first mortgage
• A 10% home equity line of credit (HELOC) as the second mortgage

Together they allow you to buy a home with just 10% down while avoiding PMI, because the first loan is only 80% of the purchase price. This loan structure is often called an 80/10/10 piggyback loan.

The HELOC works like a credit card where you can draw as needed up to your 10% limit. This gives you access to equity for things like home repairs and renovations. The main downside is that you have another monthly payment, but it is usually fairly small relative to the first mortgage.

Piggyback HELOCs typically have variable interest rates, so you have to be comfortable with some fluctuation in the payment amount. But it allows more flexible financing options when trying to avoid mortgage insurance premiums.

3. Ask Your Lender About Lender-Paid PMI

Some mortgage lenders offer what’s known as lender-paid PMI. With this option, the lender pays the monthly mortgage insurance premium on your behalf in exchange for a slightly higher interest rate on the mortgage loan itself.

Rather than a separate PMI payment, the lender just increases your overall mortgage rate by around 0.375 to 0.5 percentage points. This translates to a higher monthly payment, but it’s built in rather than a separate line item.

Lender-paid PMI can eliminate themonthly premiums and simplify your mortgage expenses. But in the long run, you’ll likely pay more overall unless you sell or refinance the home within 5-7 years. You can’t drop the higher interest rate like you could cancel regular PMI.

4. Explore Special Mortgage Programs With No PMI

In addition to the standard loan options, some lenders also offer special mortgage programs designed for specific borrowers that waive the PMI requirement.

For example, big banks like Bank of America and Citi offer special mortgages for first-time buyers, low-to-moderate income borrowers, and even certain professionals. These programs allow down payments as low as 3-5% with no monthly mortgage insurance premiums.

Doctors, dentists, nurses, teachers, emergency responders, and other essential workers may qualify for professional home financing with no PMI through state housing agencies.

The trade-off is that these special mortgages typically come with higher interest rates or stricter eligibility criteria. You’ll need to have a good credit score and meet income limits in most cases. But they can help certain buyers avoid PMI costs.

5. Check State and Local Down Payment Assistance Programs

Hundreds of state housing finance agencies, non-profit organizations, and even some local municipalities offer down payment assistance programs that provide Grants, forgivable loans, or deferred loans to