How to Save Money by Avoiding Private Mortgage Insurance (PMI)
Private Mortgage Insurance, better known as PMI, is one of the most frustrating costs for homeowners because it doesn’t protect you at all. Unlike homeowners insurance, which covers your property and belongings, PMI exists solely to protect the lender in case you default on your loan. For most buyers, it’s a monthly expense that adds nothing to your equity or financial security.
Avoiding PMI, or removing it as soon as possible, should be a priority for anyone financing a home.
When PMI Is Required
PMI only applies to conventional mortgages. Conventional loans are not backed by the federal government, which means lenders take on more risk if a borrower defaults. PMI is how they offset that risk when the borrower’s down payment is below 20%.
That means if you buy a $300,000 home and put down less than $60,000, you’ll likely be paying PMI each month until you build enough equity.
At first glance, the lack of PMI on FHA loans may seem like a perk of government funding. Unfortunately, the FHA program has its own version of mortgage insurance. Borrowers pay an upfront premium of about 1.75% of the loan amount, plus an annual premium between 0.55% and 0.85%, depending on the down payment and loan term.
While those percentages are sometimes lower than private mortgage insurance rates on a conventional loan, FHA insurance lasts much longer. If your down payment is less than 10%, it remains for the life of the loan. With 10% or more down, it can drop off after 11 years.
The only way to remove it sooner is to refinance into a conventional mortgage once you’ve built enough equity.
In short, FHA loans make it easier to buy a home with a small down payment, but the tradeoff is a longer and often more expensive insurance obligation.
USDA loans require what’s called a “guarantee fee,” and VA loans charge a one-time funding fee. Both programs allow for 100% financing, but they come with their own insurance-like costs built in.
The Real Cost of PMI
PMI rates vary depending on your loan size, credit score, and down payment, but they typically range from 0.3% to 1.5% of your original loan amount per year.
Let’s say you borrow $300,000:
At 1%, your PMI adds $3,000 per year to your mortgage, or about $250 a month.
Over five years, that’s $15,000 paid entirely for your lender’s protection.
That money doesn’t reduce your loan balance or help you build equity. It’s a pure expense, which is why avoiding PMI or removing it as soon as possible can have such a big impact on your total cost of homeownership.
How to Avoid or Remove PMI or FHA Insurance
Make a 20% Down Payment
This is the simplest and most effective way to avoid PMI from the start. With a conventional mortgage, anything less automatically triggers insurance requirements.
Refinance Once You Build Equity
If your home’s value increases or you’ve paid down a significant portion of your mortgage, refinancing into a new conventional loan can eliminate PMI or remove FHA insurance entirely. Many homeowners with FHA loans choose to refinance once they reach 20% equity, since FHA insurance can’t usually be canceled otherwise.
Monitor Your Loan-to-Value (LTV) Ratio
Once your LTV reaches 80%, you can request PMI cancellation in writing. By law, your lender must automatically remove it when you reach 78%, as long as your payments are current and your loan is in good standing. FHA insurance follows different rules, but refinancing into a conventional loan at that same equity level allows you to avoid PMI in your new loan.
Smart Mortgage Options for Homebuyers in the Monroe Area
At Ouachita Valley FCU, we offer a range of mortgage options to help members achieve homeownership on their terms:
Conventional Mortgage Loans – Typically a 3–5% minimum down payment, with PMI required only when equity is below 20%.
FHA Mortgage Loans – 3.5% minimum down payment with fixed 15- or 30-year terms.
USDA Rural Development Loans – 100% financing available for qualifying rural properties, with a small upfront and annual guarantee fee that functions like mortgage insurance.
VA Loans – 100% financing for eligible veterans, with no PMI required, but a one-time funding fee applies in most cases.
As a local credit union, we make lending decisions right here in the community. Our loan professionals also strive to educate borrowers on their options and the added costs that come with different mortgages, including insurance.
Call 318.387.4592 or apply online today if you’re ready to start exploring your options.
