Skip to main content

Are you struggling to save money for a down payment on a house? It can seem like an endless cycle of cutting expenses to squeeze a little more savings out of your budget with the hope that one day you’ll have enough to put down on a house.

That’s where private mortgage insurance can help. Oftentimes, PMI is viewed merely as an added expense. But the truth is, it can mean all the difference for you.

With a conventional home loan, PMI is required with down payments less than 20%. FHA loans, Veteran’s Administration and other government-backed financing also require insurance similar to PMI.

PMI is often confused with homeowners insurance, which protects you in case the property is damaged. PMI is insurance that protects the lender if you are unable to make house payments.

With PMI, you can buy a home sooner since you choose how much of a down payment you will make. The National Association of Realtors reports that with PMI, a buyer waits about three years to purchase a home, but without PMI that buyer would need to wait 11 years to buy the same home (based on median income of $93,000 and median purchase price of $257,000).

This chart shows down payment options on a $300,000 home purchase. Putting less down at the start could mean you have savings available for home upgrades.

You can expect to pay between .5% and 1% of the purchase price in PMI every year. With the $300,000 home, for example, that’s $1,500 to $3,000 spread over 12 monthly payments. The amount you will pay is determined by the purchase price, your credit score, your debt-to-income ratio and other factors. The type of mortgage you use and whether it’s a fixed-rate or adjustable rate loan are considered as well.

You can usually cancel PMI once you have reached 20% equity in your home, and it’s often cancelled automatically when equity reaches 22%. Some homeowners are able to make extra payments to reach that level of equity sooner. You can also factor in home improvements that increase the value of the home. To cancel PMI, homeowners need to be current on monthly payments and a new appraisal will be required at the time.

When choosing a lender, find one that negotiates PMI costs among several private insurance companies to find the most competitive product.