What Is PMI and How Do New York Buyers Avoid Paying It?

Private Mortgage Insurance – PMI – is a cost that catches many buyers off guard. It applies when a buyer puts less than 20% down on a conventional mortgage and adds a meaningful monthly expense on top of the already substantial costs of New York homeownership. Understanding what PMI is and how to manage or avoid it is practical financial knowledge for any buyer putting down less than 20%.

What PMI Is and Why Lenders Require It

PMI is insurance that protects the lender – not the buyer – in the event of default. When a buyer puts less than 20% down, the lender considers the loan higher risk because the buyer has less equity at stake and the lender has less cushion between the loan balance and the property value. PMI compensates the lender for that additional risk.

The buyer pays the premium but receives no direct benefit from the coverage. This is why PMI is a cost to be managed rather than accepted passively.

What PMI Costs

PMI typically costs between 0.5% and 1.5% of the original loan amount per year, depending on the loan-to-value ratio, the loan type, and the buyer’s credit score. On a $520,000 loan (80% of a $650,000 purchase), PMI at 1% per year is $5,200 annually – $433 per month. On a $600,000 loan, it’s $500 per month or more.

This is real money that could be going toward principal, savings, or other financial priorities.

The 20% Down Solution

The cleanest way to avoid PMI is to put 20% down. On a $650,000 home, that’s $130,000. This is a high bar for many buyers, particularly first-time buyers who haven’t accumulated equity from a prior home sale. But for buyers who can reach 20% – through savings, gifts from family, or equity from a previous home – the PMI avoidance is a concrete long-term savings.

The Piggyback Loan Strategy

For buyers who can’t reach 20% but want to avoid PMI, a piggyback loan – also called an 80-10-10 – splits the financing between a first mortgage at 80% of the purchase price and a second mortgage (typically a home equity loan) at 10%, with 10% as the down payment.

The first mortgage at 80% avoids PMI. The second mortgage carries a higher interest rate than the first but is typically at a lower blended cost than PMI would be. This strategy requires qualifying for both loans simultaneously and works best when the combined payment is lower than the 90% LTV mortgage with PMI would be.

PMI Removal Over Time

If you’re already paying PMI, it’s not permanent. Federal law (the Homeowners Protection Act) requires lenders to automatically cancel PMI when the loan balance reaches 78% of the original purchase price based on the original amortization schedule. You can request cancellation at 80% if you can demonstrate through an appraisal that the loan balance is below 80% of current value – which may arrive earlier than 78% of original price if the home has appreciated.

Track your loan balance and your home’s value. Request PMI cancellation as soon as you can credibly demonstrate eligibility. Don’t wait for the automatic cancellation at 78% if you’re eligible earlier.

I help every buyer I work with understand the full monthly cost of their purchase – including PMI where applicable – before they commit to a price range. Call me at (321) 447-4259 or visit movewithricky.com.

—

Rakesh (Ricky) Khanna | Licensed Real Estate Salesperson
Better Homes and Gardens Real Estate Realty Connect
Call or text: (321) 447-4259 | movewithricky.com