They typical answer is that paying down the mortgage is better financially for you, but these are odd times with climbing rates and people with extremely low mortgage rates. You can easily make a small spread with no risk and give you more down payment on your next home compared to just paying down on the home.
While the recent sharp climb in interest rates means it might not now be worth the effort and expense of refinancing just to cancel PMI, it's still something to keep in mind if you are close to the 20 percent equity mark. It may be much smarter to simply pay for a new home appraisal.
Put 10% Down with No PMI by Using a Piggyback Loan
The other 10% required to make up a 20% down payment comes from a second loan, worth 10% of the home's value. That second loan “piggybacks” on the mortgage. It's completely separate which means it will have its own terms and interest rate.
If you pay it upfront, you'll get the benefit of lower monthly mortgage payments. However, you might not have the funds to make this happen. Plus, if you sell your home before you would have stopped paying PMI, you paid premiums in advance for no benefit.
Down payments & PMI. Typically, buyers put down 5 to 20% of the purchase price but this can be as little as 3%. Buyers putting down less than 20% are required to pay Private Mortgage Insurance (PMI) monthly until they build up 20% equity in their home.
Disadvantages. PMI is designed to protect the lender, not the borrower. That said, PMI does not reduce the risk of foreclosure if a borrower falls behind on mortgage payments. PMI also increases your monthly mortgage payments, leaving you with less disposable income.
The Bottom Line
PMI is expensive. Unless you think you can get 20% equity in the home within a couple of years, it probably makes sense to wait until you can make a larger down payment or consider a less expensive home, which will make a 20% down payment more affordable.
Is mortgage insurance tax-deductible? No, private mortgage insurance isn't tax-deductible now. The mortgage insurance deduction was only available for eligible homeowners for the 2018–2021 tax years.
Ask to cancel your PMI: If your loan has met certain conditions and your loan to original value (LTOV) ratio falls below 80%, you may submit a written request to have your mortgage servicer cancel your PMI. For more information about canceling your PMI, contact your mortgage servicer.
Get an Appraisal
Many lenders (like Fannie Mae) also require a two-year “seasoning requirement,” meaning you can't have PMI removed until you've made two years' worth of on-time payments—even if your equity has grown above 20%. If it's been less than five years, you might even be required to have 25% worth of equity.
Avoid PMI with a bigger down payment, and expect to pay it if you put down less than 20% of your home's purchase price. Paying for private mortgage insurance is just about the closest you can get to throwing money away. This is a premium designed to protect the lender of the home loan, not you as a homeowner.
Private mortgage insurance enables borrowers to gain access to the housing market more quickly, by allowing down payments of less than 20%, and it protects lenders against loss if a borrower defaults.
He goes on to say: “Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
Paying off a mortgage has its benefits, but consider other factors such as the tax deductibility of mortgage interest and low loan rates. Investing the money instead may generate higher returns than the loan's interest cost, but markets also come with the risk of losses.
Congress extended MIP and PMI tax deductions for 2020 and 2021 in 2019, effective retroactively for 2018 and 2019 as well. The deduction wasn't allowed for taxpayers with an AGI over $109,000 or $54,500 for married couples filing separately in 2021.
The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements. Fully deductible interest. In most cases, you can deduct all of your home mortgage interest.
You pay for PMI as part of your monthly escrow payment. That means in addition to paying your property taxes and homeowners insurance into your escrow account, you also pay your monthly PMI fee into the escrow account as well.
Typically, a lender will require you to pay for PMI if your down payment is less than 20% on a conventional mortgage. You can get rid of PMI after you build up enough equity in your home. NerdWallet's ratings are determined by our editorial team.
The amount you will need depends on the type of loan you choose. A typical 20 percent down payment on a $300,000 purchase would be $60,000. The National Association of Realtors estimates the median down payment percentage in America to be 14 percent, and that would be $42,000.
Private mortgage insurance (PMI) is typically required when your down payment is less than 20% of your new home's value. PMI is automatically removed when your loan-to-value (LTV) ratio reaches 78%. You can request to have PMI removed from your loan when you reach 80% LTV in your home.
The Bottom Line: Getting Rid Of PMI Can Save You Money
If you have a conventional loan and own 20% equity in your home, contact your lender to see if they can cancel your mortgage insurance. If your mortgage has lender-paid mortgage insurance, you need to refinance your loan to ditch your insurance payments for good.
Pros of PMI
It can be difficult for buyers to save up the 20% down payment, especially due to rising home prices. PMI lets you pay less upfront, so you can place an offer for the home you have your eye on, even if you can't make the 20% down payment up front.
If the borrower is current on mortgage payments, PMI must be cancelled automatically once the LTV reaches 78 percent based on the original amortization schedule or when the midpoint of the amortization period is reached (i.e., 15 years on a 30-year mortgage).