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How To Avoid PMI Without Putting 20% Down

Writer's picture: Joseph GunermanJoseph Gunerman

Perhaps the most common real estate misconception among consumers is that you NEED to put 20% down to buy a house. It's the most common response that I get when I ask people what is keeping them in the rental market instead of buying their dream home. What if I told you that if the house costs less than $680,000 you only need to put 3% down to get a conventional loan? Furthermore if the house is more than that you still may only need to put 5% down! Crazy, right? In the US in 2021, the average first time home buyer put about 5-7% down on their house. All other buyers only averaged 10-12% down. So most buyers are not putting 20% down when they're buying their house.


However, one thing that people run into when they aren't putting 20% down is PMI - or Private Mortgage Insurance. If you don't have 20%, the bank sees you as a higher risk loan, so they charge you monthly mortgage insurance until you reach 20% equity in your house. PMI is EXPENSIVE... and it is something that keeps many people renting apartments trying to save up enough money to get to the 20% threshold so that they can avoid PMI on their early mortgage payments.


One problem though is that as you "rent and save," the value of houses is appreciating - in many cases faster than people can save from their paychecks. This means that getting to that 20% down payment on the house you love is even more difficult as the sale price of that house continues to rise. Real estate in the US has appreciated at a 4% year over year pace for the last 20 years if you average it out - and that includes the housing collapse of 2008. I've already told you that you absolutely do not need 20% down to buy the house you've always wanted, and what if I told you that you don't have to pay hundreds of dollars of PMI either?


There are 2 alternative ways to avoid PMI on your monthly payment. The first way, and the one that I recommend less often, is to do a PMI buyout at closing. This means that the lender will let you buy the PMI out in a lump sum, instead of financing it into your monthly mortgage until you reach the 20% equity threshold. The reason that I recommend this less often is because it usually doesn't solve or help the problem of not having a massive lump sum of savings to put down on the house. However, for some people who have plenty of free cash but are just trying to put less down and stay as liquid as possible, it can be a good option.


The second way, and the one that often works best for young buyer clients, is to finance the entire PMI amount into your 30 year loan. If you finance your PMI until you reach 20% equity, you're splitting your monthly payments up over a short amount of time which means higher monthly payments to pay it off more quickly. However, if you just add $5,000 or $10,000 (whatever it may be) to your total loan over 30 years, your monthly payment may only go up by as little as $10-$20 per month. For most young buyers who are only looking to live in a home for 3-5 years before they upgrade to the next one, there is not much advantage to paying off your PMI more quickly by spending hundreds of extra dollars each month for the 3-5 years that you live in the house. You'll find that spreading it over 30 years and keeping your monthly payment lower is advantageous for many reasons.


Not every realtor or lender will tell you about this strategy as I have heard it so few times since I got into the real estate business. It's just one of many ways that we help our clients save a ton of money when they purchase a home and is just another reason that who you work with matters!! Please don't hesitate to contact me if you'd like to learn more and let's start thinking about getting out of our rentals and into our dream homes!

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