Should I Pay PMI Upfront or Monthly?
Understanding the four ways you can make PMI payments
A down payment of less than 20% on a conventional loan typically comes with the extra expense of private mortgage insurance to cover the lender’s risk, should you default. Most lenders offer four different options to make PMI payments:
Monthly premium. Most borrowers choose this PMI payment option. The premium amount is based on a percentage of your loan balance and added to your monthly payment.
Single premium. Also called “upfront PMI,” this option allows you to pay the entire premium in one lump sum at your mortgage closing.
Lender-paid premium. Some lenders called this “lender-paid mortgage insurance” or LPMI for short. You agree to a bump in your mortgage interest rate and in exchange, the lender pays the PMI premium on your behalf.
Split premium. You can combine the monthly and single premium options, which means you’ll pay a portion of PMI upfront and add the remaining premium amount to your monthly mortgage payments.
How to decide if you should pay PMI upfront or monthly
The decision to pay PMI upfront or monthly comes down to whether you have the resources to pay a lump-sum premium.
You should pay PMI upfront if:
- You have the extra savings to cover the premium cost. If you have the cash to cover your down payment, closing costs and the extra premium expense, you’ll end up with a lower monthly payment.
- Your closing costs are being paid by the seller. If you negotiate for the seller to pay a percentage of your closing costs, you can apply the credit toward your PMI expense, which means the seller is effectively buying out your PMI.
- You’ve budgeted for home maintenance and other financial goals. Don’t forget to set money aside for that leaky roof or winter heater repair. The upfront premium cost shouldn’t prevent you from meeting other goals, like boosting your retirement savings or emergency fund.
You should pay PMI monthly if:
- You’re low on cash but have high credit scores. Credit scores play a big role in determining your PMI premium. If you have high credit scores, your monthly PMI cost may be low even if with a minimum down payment.
- You need to make repairs or upgrades to your home after you move in. If you’re buying a fixer-upper, you should keep extra cash on hand to cover the cost of sprucing up the home rather than paying off PMI.
- You won’t break even on the extra expense of upfront PMI. Upfront PMI only makes sense if you’ll be in your home long enough to recoup the cost of the premium. For example, if you spend $2,000 for an upfront premium instead of paying an extra $100 per month in mortgage insurance, your break-even point is 20 months ($2,000 divided by $100 equals 20 months). That means you won’t recoup the lump-sum cost unless you live in your new home for at least 20 months.
Pros and cons of paying PMI upfront
Pros
Your PMI cost is paid in full at closing. You only pay upfront PMI once, which means you won’t have any ongoing monthly mortgage insurance costs.
You’ll end up with a lower monthly payment. With your entire PMI premium paid at closing, your monthly housing expense will be lower.
You won’t need to cancel PMI later. Borrowers who choose to pay PMI upfront don’t have to worry about requesting a PMI cancellation letter.
Cons
You’ll spend more money at closing. Upfront PMI is added to your total closing costs, which could clean out your bank account depending on the premium amount.
You could lose money if you have to sell too soon. A sudden job loss or financial emergency might require you to sell your home before you break even on your upfront premium costs.
You may not get a tax benefit for the extra expense. Current IRS laws don’t allow you to write off upfront PMI premiums paid after Dec. 31, 2021.
Pros and cons of paying PMI monthly
Pros
You’ll leave more cash in the bank. Homeowners should set aside 1% to 3% of their home’s value to cover annual home maintenance and repairs. Paying PMI monthly instead of upfront leaves more room in your budget to save.
Your total closing costs will be lower. No upfront premium means you’ll write a smaller check at closing, and can spread the cost out as part of your monthly payments over time, instead of paying all at once.
Cons
Your monthly payment will be higher. Monthly mortgage insurance could mean a slightly tighter monthly budget.
You’ll have to refinance or request cancellation to get rid of it. Opting for monthly PMI means you have to request PMI cancellation, wait for it to automatically drop off once your loan-to-value (LTV) ratio hits 78%, or refinance your mortgage once a home appraisal confirms you have at least 20% equity.
How to avoid paying PMI with a piggyback loan
If you can’t gather up enough funds for a 20% down payment but are adamant about not paying mortgage insurance, a piggyback loan may be a good alternative. It involves taking out a first mortgage up to 80% of your home’s value, and “piggybacking” a home equity loan or home equity line of credit (HELOC) on top of it. Here’s how it works:
- Borrow 80% of your home’s value with a first mortgage
- Borrow 10% of the home’s value with a home equity loan or HELOC
- Make a 10% down payment with your own funds
This particular example is also known as an 80-10-10 loan. If you’re buying your home, there’s an added bonus: The interest on both mortgages is usually tax-deductible.
You may pay higher piggyback loan rates in 2023
Fees for piggyback loans were hiked in May 2023, and lenders typically pass costs on to consumers in the form of higher interest rates. You’ll also need at least a 780 credit score to get the best conventional mortgage rates in general; the previous standard was 740.