What Is Private Mortgage Insurance (PMI)?

You've saved up a solid down payment, maybe 10% or even 15%. But when you see the monthly payment breakdown, there's an extra line item: PMI. It's adding $150 to $300 a month to your housing costs, and it doesn't even protect you.

Private mortgage insurance (PMI) is a premium you pay when you put less than 20% down on a conventional mortgage. It protects the lender in case you stop making payments. The good news? Unlike some other costs of homeownership, PMI is temporary. Once you build enough equity, you can get rid of it.

Table of Contents

• Why PMI Exists
• How Much Does PMI Cost?
• Types of PMI
  • Monthly PMI (Most Common)
  • Single-Premium PMI (Upfront)
  • Lender-Paid PMI (LPMI)
  • Split-Premium PMI
• PMI vs. FHA Mortgage Insurance
• How to Remove PMI
  • Automatic Cancellation
  • Requesting Cancellation at 80% LTV
  • Using Home Appreciation
  • Refinancing
• Should You Avoid PMI by Putting 20% Down?
• PMI Is Temporary, Homeownership Isn't

Why PMI Exists

From a lender's perspective, borrowers who put less money down are riskier. If a borrower defaults on a loan and the lender has to sell the home, a smaller down payment means less cushion to cover the outstanding balance, closing costs, and potential decline in home value.

PMI fills that gap. The insurance policy pays the lender a portion of the outstanding balance if the borrower defaults. It's not a full guarantee of the loan, but it's enough to make lenders comfortable offering mortgages to buyers who haven't saved up a full 20% down payment.

Without PMI, many lenders simply wouldn't make loans with less than 20% down. So while it adds to your costs, it also makes homeownership accessible to millions of people who can't (or choose not to) put 20% down.

How Much Does PMI Cost?

PMI typically costs between 0.5% and 1.5% of the original loan amount per year, paid monthly. The exact rate depends on several factors:

• Your credit score. Higher scores get lower PMI rates. A borrower with a 760 credit score might pay 0.3%, while someone with a 680 score might pay 1.0% or more.
• Your loan-to-value ratio (LTV). The less you put down, the more you pay. A 10% down payment means higher PMI than 15% down.
• Loan type and term. Fixed-rate loans and shorter terms generally have lower PMI rates than adjustable-rate or longer-term loans.
• The PMI provider. Different insurers charge different rates. Your lender typically chooses the provider, but it's worth asking.

Here's what PMI might look like on a $400,000 home:

That $285 a month at 5% down is real money. Over the first few years, before you can remove PMI, you could pay $10,000 or more. But compare that to the alternative: waiting years to save an additional $40,000 to $60,000 for a larger down payment, all while home prices keep rising.

Types of PMI

PMI isn't one-size-fits-all. There are several ways it can be structured:

Monthly PMI (Most Common)

This is the standard approach. You pay a monthly premium added to your mortgage payment. It's the most straightforward and usually the easiest to cancel once you build equity.

Single-Premium PMI (Upfront)

You pay the entire PMI cost as a lump sum at closing. This eliminates the monthly charge, which can help with debt-to-income ratio calculations since lenders won't count a monthly PMI payment against you.

The downside: if you sell or refinance within a few years, you don't get a refund on the unused portion (in most cases).

Lender-Paid PMI (LPMI)

The lender covers the PMI cost, but in exchange, you accept a higher interest rate for the life of the loan. The advantage is no separate PMI payment. The disadvantage is you can never remove it, since it's baked into your rate. Even after you reach 20% equity, you're still paying the higher rate.

Split-Premium PMI

A hybrid approach where you pay part of the premium upfront and the rest monthly. This lowers both your upfront costs and your monthly payment compared to choosing either option alone.

PMI vs. FHA Mortgage Insurance

PMI and FHA mortgage insurance are often confused, but they work differently.

The big difference: conventional PMI goes away, but FHA mortgage insurance is typically permanent if you put less than 10% down. This is one of the key considerations when choosing between an FHA and conventional loan.

How to Remove PMI

This is the good part. There are several ways to get rid of PMI on a conventional loan:

Automatic Cancellation

Your lender is legally required to cancel PMI when your loan balance reaches 78% of the original purchase price. This happens automatically based on your amortization schedule, and you don't need to do anything.

On that $360,000 loan (from a $400,000 home with 10% down), automatic cancellation would happen when the balance drops to $320,000 ($400,000 x 0.78). Based on normal amortization at 6.5%, that takes about 9 years.

Requesting Cancellation at 80% LTV

You don't have to wait for 78%. Once your balance hits 80% of the original purchase price, you can contact your lender and request PMI cancellation. You'll need to:

1. Make the request in writing
2. Be current on your payments (no late payments in the past 12 months)
3. Show that there are no other liens on the property
4. Potentially pay for a new appraisal to confirm the home's value

Using Home Appreciation

If your home has gone up in value, you might reach 20% equity faster than the amortization schedule suggests. Some lenders allow you to request PMI removal based on the current value of your home (not just the original purchase price), provided:

• You've had the loan for at least 2 years
• You can prove the new value with an appraisal
• The new LTV is 75% or below (some lenders use 80%)

In a market where home values have risen significantly, this can shave years off your PMI payments.

Refinancing

If your home's value has increased substantially, refinancing into a new loan at 80% LTV or less eliminates PMI entirely. Of course, refinancing has its own costs, so make sure the math works. Factor in closing costs (typically 2% to 5% of the loan amount) and compare the monthly savings from dropping PMI against those costs.

Should You Avoid PMI by Putting 20% Down?

Not necessarily. Here's the math that often gets overlooked.

Say you're buying a $400,000 home. You have $40,000 saved (10% down) and could wait another 2 to 3 years to save $80,000 (20% down).

With 10% down and PMI of $165/month, you'd pay about $5,940 in PMI over 3 years before you could request removal.

But during those 3 years, home prices might rise 3% to 4% per year. That $400,000 home could cost $437,000 to $450,000 by the time you save up 20%. You'd need an even larger down payment for a more expensive house.

Paying $5,940 in PMI to buy sooner could actually be cheaper than waiting, especially if home values are appreciating. Plus, you're building equity and benefiting from appreciation during those years instead of renting.

Of course, the decision depends on your local market, your financial situation, and your comfort level. But don't let PMI alone be the reason you wait.

PMI Is Temporary, Homeownership Isn't

PMI is an extra cost that makes it possible to buy a home with less than 20% down. It protects the lender, not you, and it adds to your monthly payment. But it's temporary.

For many first-time buyers, paying PMI is a smart tradeoff that gets you into a home years earlier than waiting to save a full 20% down payment. Focus on getting a competitive PMI rate, understand how to remove it as soon as possible, and factor the cost into your overall budget when deciding how much house you can afford.