What percentage is typically considered the threshold for consumers to avoid PMI when making a down payment?

• A. 10%
• B. 20%
• C. 25%
• D. 30%

Answer: (B)

A down payment of 20% is typically regarded as the threshold for consumers to avoid paying Private Mortgage Insurance (PMI). PMI is an insurance policy that protects lenders in case a borrower defaults on their loan, and it generally applies to loans where the down payment is less than 20% of the property’s purchase price. By providing a 20% down payment, borrowers demonstrate to lenders that they have a significant equity stake in the property right from the outset, reducing the lender's risk. Consequently, this allows borrowers to eliminate the extra cost associated with PMI, which can be a substantial monthly expense depending on the size of the loan.

While some lenders may offer options to avoid PMI with down payments lower than 20%, the standard industry practice remains that a down payment of 20% is the conventional benchmark for avoiding such insurance.