Avoid PMI With A 20% Down Payment

Karen on Twitter asks what PMI is and if it can be avoided. Dave explains.

QUESTION: Karen on Twitter asks what PMI is and if it can be avoided. Dave explains.

ANSWER: PMI stands for private mortgage insurance. Basically, private mortgage insurance is foreclosure insurance. If you don’t put down at least 20% on a property—meaning that they are loaning more than 80% loan-to-value ratio—then the mortgage company requires you to buy insurance that pays them in the event they have to foreclose on you and they lose money.

For instance, if you buy a $100,000 house and only put $10,000 down and they have to foreclose, the bank will lose some money on that. PMI pays them down to the $80,000 mark to ensure that they don’t lose or don’t lose as much money.

It can be avoided. PMI will cost you about $60–70 a month per $100,000 borrowed. It can be avoided by simply making a 20% down payment on a traditional, conventional mortgage. Or, after you’ve bought the house, if the house goes up in value and you pay down the mortgage over time to where you can have the house appraised again at your expense, they will drop the PMI if the loan has gone down below 80% of the value. That 80% loan-to-value ratio is what you’re looking for to get rid of PMI. That’s why I like for people to be debt-free, have a good emergency fund, plus a big down payment when they buy, because you avoid this ridiculous expense.