What is Private Mortgage Insurance (PMI) and How Can You Avoid it?

If you're buying a home with less than 20% down, whether it’s in Dallas, Houston or Austin, you'll most likely have to pay something called Private Mortgage Insurance—better known as PMI. PMI is often necessary for those having difficulty coming up with a big down payment (especially at these home prices) and want to become a homeowner sooner rather than later. But not all PMI is created equal—and if you’re strategic, you can make sure you’re paying as little as possible and not throwing money down the drain.

Let’s break down how PMI works, when you’re required to pay it (and when you’re not), and why working with a mortgage broker can help you get a better deal.

What Is PMI?

First, let’s give some historical context. PMI—Private Mortgage Insurance—was created in the 1930s as a response to rising foreclosure rates during the Great Depression. At the time, most loans required massive down payments and short repayment terms, which made homeownership inaccessible for many. When the housing market collapsed during the Great Depression and defaults skyrocketed, lenders became even more risk-averse.

To restore confidence in the mortgage system and allow smaller down payments, Mortgage Guaranty Insurance Corporation (MGIC) was founded in 1957 and issued the first modern PMI policy. The idea was simple but effective: insurance would cover the lender’s risk on loans with high loan-to-value (LTV) ratios—usually over 80%.

The creation of PMI allowed lenders to issue loans with as little as 5% down while still being protected. Over time, PMI became a standard feature of conventional loans backed by Fannie Mae and Freddie Mac, and is now one of the primary tools that enables homeownership for borrowers who can’t or don’t want to put down 20%.

PMI is usually paid monthly as part of your mortgage payment, though it can also be paid upfront or through a slightly higher interest rate in what's called lender-paid PMI (LPMI). The cost generally ranges from 0.2% to 1.5% of your loan amount annually and is based on factors like your credit score, loan amount, and loan-to-value ratio (LTV).

For FHA loans, the concept is similar but goes by a different name: Mortgage Insurance Premium (MIP). FHA loans require both an upfront MIP of 1.75% and an annual premium, typically 0.55%, paid monthly. It’s more expensive than PMI on conventional and here’s the biggest difference: even if you put 20% down on an FHA loan, you still pay MIP—which can last for the entire life of the loan unless you refinance into a conventional mortgage. It’s one reason why the interest rate is lower on FHA financing, because the loan is essentially guaranteed throughout it’s entire life. Most individuals who buy with FHA financing will look to switch it to a conventional loan once they reach an 80% LTV through a refinance.

Non-QM loans, like DSCR loans or self-employed bank statement programs, don’t require PMI at all. The reason is because they fall outside of the standardized guidelines set by Fannie Mae and Freddie Mac. Non-QM lenders build the added risk directly into the terms of your loan—typically with a higher interest rate or larger down payment requirement. For instance, non-QM loans may have a minimum down payment 10%, instead of the 3% allowable under conventional financing.

Conventional loans, by contrast, use PMI as part of the tradeoff for offering more competitive rates when you don’t meet the standard 20% equity threshold. PMI keeps the system running smoothly and allows borrowers to access the best available rates, even when putting down less.

When Do You Have to Pay PMI?

Can You Avoid PMI Without Putting 20% Down?

Yes, if you are going conventional—but you’ll want to do the math carefully.

One option is using a second lien loan when buying your home. So there will be the initial conventional loan of 80%, then the second lien of 10% and then the buyer covers the remaining 10%. It might seem like the go-to move to save on PMI, but remember that second liens typically have a much higher rate than the first lien. Make sure that you are comparing the added cost of PMI with the added cost from the second lien to see which option is cheaper.

So, whether you go conventional or FHA, some form of mortgage insurance is likely in the picture if you’re putting down less than 20%. But how much you pay—and how long you pay it—varies a lot.

A second option doesn’t really avoid PMI entirely but it does avoid monthly PMI by taking the lender-paid PMI (LPMI). In this setup, your lender pays the PMI upfront, and in exchange, you accept a slightly higher interest rate. Again, it’s all about the math—sometimes LPMI works out cheaper over time, sometimes it doesn’t. A broker can help you compare both scenarios side by side.

How to Make Sure You’re Paying the Lowest PMI Possible

If you HAVE to pay PMI, you want to be sure you aren’t overpaying for it.

Similar to how your interest rate is calculated, the amount you’ll pay in PMI depends on your credit score, loan type, loan amount, and LTV. BUT many lenders apply their own overlays on top of that—basically increasing your PMI rate even if you technically qualify for something better. Disaster!

That’s where a mortgage broker can help. Instead of being stuck with one lender’s PMI pricing, a broker can shop across many lenders to find one that offers lower premiums for your specific profile.

For example, if you have a 760+ credit score and are putting down 5%, some lenders might offer PMI as low as 0.25%, while others could quote 0.75% for the same borrower. That difference can save you thousands over the life of your loan.

Big banks and retail lenders usually work with just one or two mortgage insurance providers—and they’re not always the cheapest. Mortgage brokers, on the other hand, work across many lenders, many insurers, and many loan programs. That flexibility means they can target the combo that gets you the best overall deal—including PMI.

Whether you're buying in Austin, Dallas, or Houston, home prices and taxes vary widely by neighborhood, so it's critical to structure your loan in a way that fits your goals. Want the lowest monthly cost? A broker can help you structure your down payment to get there. Want to minimize upfront fees? They’ll show you lenders with affordable monthly PMI. Want the ability to drop PMI as soon as possible? A broker can show you how appreciation, faster payments, or even a future refinance can get you to that 20% mark sooner.

Final Thoughts

PMI is a huge advantage to becoming a homeowner early. It allows you to access the lower rates of conventional financing. It doesn’t have to be the villain in your homebuying journey.

You’ve got options. And a mortgage broker like LendFriend can help you see—and understand—all of them. Let’s talk about your goals and figure out the best way to get you home—wherever that home may be. Give us a call   512.881.5099 or get in touch with me by completing this quick form, and I'll be in touch as soon as possible.