Private mortgage insurance (PMI) is required on conventional loans when you put down less than 20%. Many borrowers treat it as an unavoidable evil. Here's the truth: sometimes paying PMI is the smarter financial move.
When paying PMI makes sense
Consider this scenario: you have $60,000 saved and you're looking at a $400,000 home. You could put 15% down ($60,000) and pay PMI, or wait and save another $20,000 for 20% down.
While you're saving that extra $20K, the home may appreciate $20K+ in value. You've missed that equity gain. Meanwhile, your PMI might cost $150/month. Over two years of saving, that's $3,600 in PMI versus $20,000 in lost appreciation.
In many markets, putting less money down and investing the difference is the mathematically better play. Austin runs these scenarios for every client.
How to remove PMI early
Request removal at 80% LTV
By law, you can request PMI removal when your loan balance reaches 80% of the home's original value. You must be current on payments.
Automatic termination at 78%
Your lender must automatically cancel PMI when the balance reaches 78% of the original value.
Appraisal-based removal
If your home has appreciated significantly, you can request removal based on the current value. You need a new appraisal showing 20%+ equity.
Recast after lump-sum payment
Make a lump-sum principal payment and recast the loan. This lowers the balance and can eliminate PMI faster.
FHA vs. conventional: the PMI trap
FHA loans require mortgage insurance (MIP) that often lasts for the life of the loan, regardless of how much equity you have. Conventional PMI can be removed. This is one reason Austin sometimes recommends conventional over FHA, even when FHA has a lower initial rate.
The total cost comparison between FHA and conventional should always account for how long you'll pay mortgage insurance, not just the initial monthly payment.