Buying and Selling

Putting Less Than 20% Down on Your Home? Read This.

Private mortgage insurance (PMI) can help aspiring homebuyers to move in with less than 20% down

Don’t have 20 percent saved for a down payment on a home? You're not alone. The good news: Although 87 percent of first-time homebuyers think 10 percent (or more) is necessary, the average down payment among first-time buyers is 7 percent; for repeat buyers, it’s 16 percent.1 Some homebuyers put down even less.

But there's a tradeoff, if you do put down less than 20 percent when you buy your home, you may be required to pay private mortgage insurance, or PMI. PMI helps reduce the risk for the lender in case the borrower doesn’t repay their mortgage.

What you pay for PMI depends on your credit history and other factors, like how much money you put down. That said, PMI is generally around 1 percent or less of your mortgage balance each year.2 So a $300,000 mortgage could have a yearly PMI cost of around $3,000.

PMI can help you make your home buying dream a reality sooner. It can also give you confidence by allowing you to save some of your cash reserves for other priorities (versus putting it all toward a down payment). Here’s a look at the four most common types of PMI so you can evaluate the best choice for you.

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1. Borrower-Paid PMI (You pay monthly)

Borrower-Paid PMI is the most popular PMI type, and consists of a monthly fee added to your regular mortgage principal and interest payment.

The best part about borrower-paid PMI? It doesn’t last forever. Once you have 20 percent equity in your home, you can work with your lender to cancel it. (Even better—once you have 22 percent equity, assuming you are current on your house payments, it may be canceled automatically.3)

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2. Single-Premium PMI (You pay one large amount)

Single-premium PMI is exactly what it sounds like: you pay one lump sum at closing, often by including it in the total loan amount. While this can result in a lower overall monthly payment than the more-common borrower-paid PMI, the initial lump-sum payment is non-refundable. So if you sell your home or refinance within a few years, you essentially lose that upfront payment.

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3. Lender-Paid PMI (Your lender pays)

In this option, the lender pays the insurance, and you reimburse them by paying a higher interest rate on your mortgage loan. What would ordinarily be broken out as a PMI fee is built into your overall mortgage rate for the life of that loan, so your monthly payments won’t change until the loan is either refinanced or paid off. As a result, this type of PMI is best for those who plan to refinance or sell the home in a few years.  

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4. Split-Premium PMI (You pay one large amount + monthly)

This option is the least common type of insurance and is not offered by all lenders. It gives homebuyers the option of paying a lump sum toward their PMI at closing and then spreading out the remainder on a monthly basis. This option can be a good middle ground for those who have a little extra to contribute to PMI upfront but still want to spread out the payments over time.

PMI is just one strategy that can help make home buying a reality for those who need (or want) to put less than 20 percent down. It can enable homebuyers to purchase sooner or save money for other priorities. There are also options such as down payment assistance programs and affordable loan programs that may provide homebuyers with down payment alternatives.  

What makes the most sense for you depends on a variety of factors, and there’s a lot to consider, so talk to your lender about your specific situation.

Talk to your lender about your PMI options

There's a lot to consider. Talk to an experienced loan officer to discuss your financing options. 

1 “2018 Profile of Home Buyers and Sellers,” Oct. 29, 2018, National Association of REALTORS

2 “What Is Private Mortgage Insurance?” Dec. 14, 2016, The Motley Fool

3 “How to Calculate Equity to Remove PMI,” Nov. 21, 2017, The Nest (NOTE: Automatic cancellation of PMI may only be available on owner-occupied property.)

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