You want to buy a home but cannot afford to make a large down payment. Thankfully, potential buyers have options and may qualify for a home mortgage loan while putting down a small down payment. However, such a common situation does often come with strings attached.

Lenders want the security that comes along with borrowers investing in a home with a down payment of at least 20 percent. When this is not possible, they look for another way to protect the loans they are making. If a borrower cannot put at least 20 percent down, lenders consider these borrowers to be a higher risk. To protect this risk, lenders require borrowers to purchase Private Mortgage Insurance, or PMI.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Is Private Mortgage Insurance Mandatory for All Loans?

Yes and no. Not everyone buying a home and taking out a home mortgage loan will need to have Private Mortgage Insurance. PMI is usually required for those borrowers who do not put down at least 20% toward the purchase price of the home. These borrowers will need to acquire and pay the associated PMI premiums. Most borrowers choose to have these premiums rolled into their monthly mortgage loan payments. However, note that PMI premiums do not help with building equity or assist in paying off a home loan. Rather, the premium payments go directly to the lender as a form of insurance on a higher-risk loan.

The good news is that PMI may not apply for the life of a home loan. Homebuyers who establish sufficient equity, they no longer are required to make PMI payments.

Can PMI Be Canceled?

Whether or not PMI can be canceled depends on whether or not a borrower has taken out a conventional loan. This is because in the case of an FHA loan, PMI is necessary for the life of a loan for those approved for an FHA home loan. Understand that while there are a number of home loan options for those borrowers planning to make a small down payment, it may be worthwhile to improve credit scores and other factors that go into getting approved for a conventional home mortgage loan vs. an FHA loan.

When will a homeowner no longer need to pay PMI? One of the first steps is to have at least 20 percent in home equity and provide proof through an independent appraisal to a lender. PMI requirements are usually automatically eliminated when a 78 percent balance remains on the home loan. This only applies to a conventional home loan. Those who have taken out an FHA loan cannot go through this process but must have the loan refinanced through a non-FHA lender.

Are There Other Ways to Eliminate PMI Payments Faster?

There are a few ways to potentially get out of paying PMI earlier on a conventional home mortgage loan. Borrowers may choose to:

• Increase the value of home through remodeling;
• Prepay a loan;
• Have an appreciated home refinanced; or
• Go for a new appraisal.

It may be necessary to wait two years before attempting to have a loan refinanced. Borrowers may also want to look into combination loans or VA loans to avoid paying PMI altogether.

PMI is an often used term and mortgage tool for lenders. It assists mortgage lenders to loan to home buyers who may put less than 20% down on a home. Home buyers have mortgage and home options. Hermitage TN real estate agents and mortgage brokers can assist home owners with mortgage and home buying questions.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.