Private Mortgage Insurance (PMI) is a type of insurance that protects the lender if a borrower defaults on their mortgage payments.  It is required when a borrower makes a down payment of less than 20% of the home’s purchase price. PMI allows borrowers to obtain a mortgage with a smaller down payment, but it adds an additional cost to the monthly mortgage payment. Here is how Private Mortgage Insurance (PMI) works and how you can avoid it:

1. Loan to value ratio (LTV): PMI is typically required when the loan to value ratio exceeds 80%. LTV is the ratio of the mortgage amount to the appraised value of the property. For example, if you purchase a home worth $200,000.00 and make a $40,000.00 down payment, your mortgage amount would be $160,000.00, which would be an 80% LTV.
2. Make a larger down payment: By making a downpayment of at least20%, you can avoidPMI altogether.
3. Piggyback Mortgage: Another option is to take out two mortgages instead of one. The first mortgage would cover 80% of the home’s purchase price, and the second mortgage would cover the remaining amount. This way you avoid PMI because the first mortgage does not exceed the 80% LTV threshold.
4. Lender paid mortgage insurance(LPMI): In some cases the lender may offer to pay for the mortgage insurance on your behalf. With LPMI, you don’t pay a separate mortgage PMI premium; instead, the lender incorporates the cost of the insurance into your mortgage interest rate. You won’t have a separate monthly PMI payment, although the interest rate will be higher.
5. Rapidly build equity: If you already have a mortgage with PMI, you can take steps to eliminate it sooner. Making additional payments or increasing your monthly mortgage payment can help you build equity faster. Once your LTV ratio reaches 80% or less, you can request to cancel the PMI with your lender.
6. Refinance your mortgage: If your home’s value has increased significantly or you’ve paid down a significant portion of your mortgage, you may consider refinancing your mortgage. This allows you to obtain a new loan without PMI if the LTV ratio meets the lender’s requirements.