It’s true, you don’t need 20% down to buy a home. If you are going to put down less, you may, more often than not, be required to pay for mortgage insurance, which can add hundreds of dollars to your monthly payment. 

Why would this be required? To protect your lender. 

PMI is the type of insurance that goes with a conventional loan. If you are getting a FHA loan (common for first time home buyers) you will have MIP (mortgage insurance premium) which functions a bit differently. For today, we’re focusing on PMI. 

PMI varies in cost based off purchase price, down payment, credit score & loan type- but, it roughly runs 0.1% to 2% of your loan amount per year. This total is broken down on a monthly basis & included within your monthly payment. 

For example: Say your monthly mortgage may be $2500 & your PMI is $150 a month… your total monthly payment will be $2650. 

Now, you don’t have to have PMI forever. Once you have at least 20% equity in your home or your LTV (loan to value) ration is around 78%, you can request your lender remove your PMI. This can happen a few ways: (1) over time as the market conditions change + values go up (2) you make improvements to your home that increase the value (3) you make extra payments to reduce PMI quicker. 

We actually did this with our first house. We did not have enough money in the bank to put 20% down, so we put down what we could. Then, we started to make improvements to this house + the market picked up drastically causing our property value to increase. We reached out to Amy (our real estate agent at the time) & she confirmed that with our remodeling & the market conditions, it would be a great time to reach out to our lender & request a new appraisal. The appraisal came in & our LTV ratio was below 78%, allowing us to drop the PMI & pay less per month! 

PMI is not the end of the world & can actually be very helpful in terms of enabling you to get into a home with less down. That being said, it is important to understand it, recognize it & know how it can be rid of when that time comes!