What Is Private Mortgage Insurance (PMI) and How Do I Avoid It in Minnesota?

Private mortgage insurance, or PMI, is insurance that protects your lender if you default on your mortgage. Conventional loans require it when your down payment is less than 20 percent. You can avoid it by putting 20 percent down or by using certain loan programs, and in some situations paying it is a reasonable choice.

What PMI is and why lenders require it

PMI protects the lender, not you. You pay the premiums, and the lender receives the protection.

When you put less than 20 percent down, the lender is financing more than 80 percent of the home's value. If a borrower defaults and the home is sold in foreclosure, the sale may not cover what the lender is owed. PMI covers that gap.

It helps to see PMI as the cost of buying a home sooner than you could if a full 20 percent were required. Without it, many lenders would not offer loans with smaller down payments at all.

What affects the cost

PMI is calculated as a percentage of your original loan amount. The rate depends on your credit score, your loan-to-value ratio, your loan type and the PMI provider.

A higher credit score typically means a lower rate. A larger down payment does too. The closer you are to 20 percent down, the less you typically pay.

Lenders are required to show the PMI cost on your loan estimate. Ask about it early, so the line does not surprise you later.

How PMI is paid

There is more than one way to pay PMI. It is worth knowing which one your loan estimate uses.

• Monthly PMI. The annual premium is divided by twelve and added to your mortgage payment. This is the most common structure.
• Upfront PMI. You pay a lump sum at closing. This lowers or removes the monthly charge but raises your closing costs.
• Lender-paid PMI. The lender pays the premium in exchange for a higher interest rate for the life of the loan.
• Split PMI. You pay part at closing and a reduced amount each month.

Five ways to avoid PMI

Each of these has its own requirements and trade-offs.

• Put 20 percent down. At that level, a conventional loan does not require PMI.
• Use a piggyback loan. Sometimes called an 80-10-10 loan, this pairs a first mortgage for 80 percent of the price with a second mortgage for 10 percent and a 10 percent down payment. The second loan typically carries a higher rate, so compare the combined payment with a single loan that has PMI.
• Use a loan program without PMI. VA loans, for eligible veterans, active service members and certain surviving spouses, do not require PMI. USDA loans for eligible buyers and properties in eligible rural areas do not require it either, though they have their own guarantee fee.
• Ask about specialty loans. Some lenders and credit unions offer products without PMI for buyers who meet specific criteria, such as physician loans. These can come with trade-offs in other terms.
• Wait and save more. A larger down payment reduces or removes PMI and lowers the loan amount and total interest. The trade-off is paying rent while you save.

Minnesota down payment help

Minnesota Housing Finance Agency programs, including the Start Up program for first-time buyers, provide down payment and closing cost assistance. That help can raise your effective down payment, which may reduce or in some cases remove PMI.

Dakota County, Anoka County, and other Minnesota counties and cities have local programs that work alongside the state programs. Some have income limits and price limits. The program or the county confirms the current numbers, and a lender who knows Minnesota's programs can check which ones fit you.

When PMI is worth paying

PMI is not always something to avoid. There are three common situations where paying it can make sense.

• Waiting to save more would mean paying rent in the meantime, and possibly paying more for the home if prices are rising.
• Putting 20 percent down would leave you with very little in cash reserves for an unexpected expense.
• You expect to build equity quickly, so the period when PMI is required may be short.

These are individual calculations. Ask your lender to compare loan scenarios with different down payments, so you can see how PMI changes your monthly cost. If you will pay PMI, ask when it can be cancelled and track your progress toward that point.

Common questions

Is PMI required on all conventional loans? No. It is required when the down payment is less than 20 percent. Conventional loans with 20 percent or more down do not require it.

Is PMI tax deductible? The rules have changed over the years. Ask a tax professional about the current tax year.

How long does PMI last? It lasts until your loan-to-value ratio reaches the point where it is no longer required. That can come from your payments, from the home gaining value or from both. Your lender can confirm the rules for your loan.

Is PMI the same as homeowners insurance? No. Homeowners insurance is separate, required coverage that protects you. PMI protects the lender.

If you would like help thinking through your down payment and loan options, send us a message. We'll explain each step in plain words. You can also read more on our buying process page.