How to avoid PMI on a mortgage loan: Your options explained

Buying a home is exciting, but it can also feel financially overwhelming. Between saving for a down payment, covering closing costs, and managing monthly payments, many buyers look for every possible way to reduce expenses.

One cost that often comes up is private mortgage insurance (PMI). PMI is typically required on conventional loans when you put down less than 20% of the home’s purchase price. It protects the lender – not the borrower – in case you stop making payments, and it’s usually added to your monthly mortgage bill. This primarily applies to conventional loans, as FHA loans have different mortgage insurance rules.

Because of this added cost, many buyers find themselves weighing a key decision: Should you wait and save for a full 20% down payment, or move forward with a smaller down payment and pay PMI for a period of time? The right choice depends on your financial situation, timeline, and long-term goals.

Understanding your options can make a big difference in both your upfront costs and your long-term monthly payments. Ahead, you’ll learn several ways to avoid PMI, along with strategies that may help you reduce or eliminate it over time.

What is PMI, and when is it required?

Private mortgage insurance (PMI) is a type of insurance typically required on a conventional mortgage when a borrower makes a down payment of less than 20% of the home’s purchase price. PMI typically ranges from about 0.3% to 1.5% of the loan amount annually.

Generally, PMI is designed to protect the lender, not the homeowner. If a borrower stops making payments and the home goes into foreclosure, PMI helps cover some of the lender’s financial loss. While it doesn’t provide direct benefits to the borrower, it allows buyers to qualify for a loan with a lower down payment than would otherwise be required.

The cost of PMI is usually added to your monthly mortgage payment, though in some cases it can be paid upfront or structured differently depending on the loan. The exact cost varies based on several factors, including your loan amount, credit score and the size of your down payment. Generally, the less you put down and the higher the perceived risk, the more you’ll pay for PMI.

How to avoid PMI on a mortgage loan

If you’re hoping to lower your monthly mortgage payment and reduce long-term costs, avoiding PMI can be a smart goal, depending on your timeline and financial situation. It’s common for many buyers - especially first-time homeowners - to pay PMI. It's also important to note that in some cases, paying PMI temporarily may make more financial sense than delaying your home purchase. 

Put 20% down

One of the most straightforward ways to avoid PMI is to make a 20% down payment on your home. When you reach this threshold, lenders typically consider the loan less risky, which means private mortgage insurance is likely no longer required.

To put this into perspective, consider the current housing market. If a home costs around $400,000, a 20% down payment would be $80,000. For a $300,000 home, you’d need $60,000 upfront. While these amounts can feel significant, reaching that 20% mark can eliminate PMI entirely and lower your monthly payment over the life of the loan.

If saving that much feels out of reach, you’re not alone - many buyers choose lower down payments to purchase sooner. However, if avoiding PMI is a priority, it may be worth exploring ways to increase your savings or adjusting your home budget to make that 20% down payment more achievable.

Use a piggyback loan

Another way to avoid PMI is by using a piggyback loan. This strategy involves taking out two loans at the same time - typically a primary mortgage for 80% of the home’s value and a second loan (often a home equity loan or line of credit) to cover part of the remaining balance. Combined with a small down payment, this structure helps you avoid exceeding the 80% loan-to-value (LTV) threshold that triggers PMI.

A common example is the “80-10-10” structure: 80% for the main mortgage, 10% for the second loan, and 10% as your down payment. Because your first mortgage stays at or below 80% of the home’s value, PMI isn’t required.

While this approach can help you avoid PMI, it does come with trade-offs. The second loan often has a higher interest rate than the primary mortgage, which can increase your overall borrowing costs. You’ll also be responsible for two monthly payments instead of one, and you may face additional closing costs.

Explore lender-paid PMI

Another option to consider is lender-paid PMI. With this arrangement, the lender covers the cost of the mortgage insurance, but in exchange, you’ll accept a higher interest rate on your loan.

While this can reduce your upfront or monthly PMI charges, it doesn’t mean you’re avoiding the cost entirely. Instead, the cost of the insurance is built into your mortgage rate, which increases your monthly payment over time.

One of the main downsides of lender-paid PMI is that the higher interest rate typically stays in place for the life of the loan. Unlike traditional PMI, which can be removed once you reach a certain level of equity, lender-paid PMI can’t be canceled without refinancing. This means you could end up paying more in the long run, even if your home value increases.

Consider a VA or USDA loan

Some government-backed loan programs can help you avoid PMI altogether. Loans such as VA and USDA loans don’t require private mortgage insurance, and in many cases, they also don’t require a down payment.

VA loans are available to eligible veterans, active-duty service members, and certain military spouses, while USDA loans are designed for buyers purchasing homes in qualifying rural and suburban areas. Because these programs are backed by the government, lenders are able to offer more flexible terms without requiring PMI.

However, these loans come with their own costs and requirements. VA loans typically include a funding fee, and USDA loans require an upfront guarantee fee along with an annual fee that functions similarly to mortgage insurance. Additionally, both loan types have eligibility criteria, such as service requirements for VA loans or income and location limits for USDA loans.

Receive gift funds or down payment assistance

If saving a full 20% down payment on your own feels out of reach, gift funds or down payment assistance programs can help bridge the gap. Both options are designed to make homeownership more accessible: They may help you increase your down payment and potentially reach the 20% threshold.

Gift funds typically come from family members and can be used toward your down payment, as long as they meet lender guidelines and are properly documented. Down payment assistance programs, often offered by state or local agencies, may provide grants or low-interest loans to help cover upfront costs.

By combining your own savings with these resources, you may be able to increase your down payment enough to avoid PMI altogether. It’s important to check eligibility requirements and program rules, but for many buyers, these options can make a significant difference in reducing long-term mortgage costs.

Buy a lower-priced home

If avoiding PMI is a top priority and saving a full 20% down payment isn’t feasible with your current budget, you may want to consider purchasing a lower-priced home. By reducing your purchase price, the total amount needed for a 20% down payment becomes more manageable.

For example, a 20% down payment on a $500,000 home is $100,000, while the same percentage on a $350,000 home is $70,000. Adjusting your budget could make it easier to reach that threshold without stretching your finances too thin.

While this may mean compromising on size, location, or certain features, it can help you avoid PMI and lower your overall monthly housing costs. For many buyers, finding the right balance between affordability and long-term savings is key.

Can you remove PMI later? 

If you’re not able to avoid PMI upfront, the good news is that PMI removal is often possible over time. As you build equity in your home or your property value increases, you may have opportunities to eliminate this extra cost and lower your monthly payment.

Pay extra toward your mortgage

One way to speed up PMI removal is by making extra payments toward your mortgage principal. By paying more than your required monthly amount, you reduce your loan balance faster, which helps you build equity in your home more quickly.

As your equity increases, your loan-to-value (LTV) ratio decreases. Once you reach the required threshold - typically 80% LTV - you may be eligible to request PMI removal. Making additional payments can help you hit that milestone sooner than scheduled.

Even small extra payments over time can make a difference, so if your budget allows, this strategy can be an effective way to reduce your overall loan cost and eliminate PMI earlier.

Request PMI cancellation at 80% LTV

Another way to achieve PMI removal is by requesting cancellation once you reach 20% equity in your home, which brings your loan-to-value (LTV) ratio down to 80%. At this point, many lenders allow you to formally ask to have PMI removed from your loan.

This option can make sense if you’ve been making extra mortgage payments and have paid down your balance faster than scheduled. It may also apply if your home’s value has increased, giving you more equity without needing to wait as long.

Keep in mind that lenders may require proof that you’ve reached the 80% LTV threshold. In some cases, this means paying for a new home appraisal to confirm your property’s current value. While this is an added cost, it can be worthwhile if it helps you eliminate PMI and reduce your monthly payment.

Wait for automatic PMI removal at 78% LTV

If you don’t request PMI removal earlier, it won’t last forever. PMI is automatically removed once your loan is scheduled to reach 78% of the home’s original value, based on your initial amortization schedule, provided you're current on your payments.

This means that as long as you stay current on your payments, your lender is required to cancel PMI at this point - even if you don’t take any action. However, this timeline is based on the original loan balance and payment schedule, not any increase in your home’s market value.

While automatic removal provides a clear endpoint, it may take longer than other PMI removal strategies, especially if your home has appreciated or you’ve made extra payments.

Refinance your mortgage

Refinancing your mortgage is another way to achieve PMI removal. When you refinance, you replace your current loan with a new one - ideally with a lower loan-to-value (LTV) ratio. If your home has gained value or you’ve paid down enough of your balance, you may be able to refinance into a new loan without PMI.

This option can make sense if your property value has increased significantly, giving you at least 20% equity. It may also be a good time to refinance if interest rates have dropped or your credit has improved, allowing you to qualify for better loan terms.

However, refinancing does come with closing costs and fees, so it’s important to weigh those expenses against the potential savings from eliminating PMI and possibly securing a lower interest rate.

The bottom line: You can avoid PMI or remove it early

PMI can add to your monthly housing costs, but there are several ways to avoid it or eliminate it sooner than expected. From putting 20% down and using a piggyback loan to exploring lender-paid PMI or government-backed loan options, each strategy comes with its own benefits and trade-offs.

If avoiding PMI upfront isn’t possible, focusing on PMI removal later - by building equity, making extra payments, or refinancing - can help reduce your costs over time. The right approach depends on your financial situation, how long you plan to stay in the home, and how quickly you can build equity.

Ultimately, it’s important to weigh the upfront savings of a lower down payment against the long-term cost of PMI. If you’re considering refinancing as a way to remove PMI or lower your rate, you can start a loan application with Rocket Mortgage to explore your options and see what you may qualify for.