Private mortgage insurance (PMI) is an extra cost that most buyers face when they put down less than 20% on a home. It protects the lender — not you — if you default on your loan, but you are the one who pays for it. Understanding how PMI works, what it costs, and how to get rid of it can save you tens of thousands of dollars over the life of your mortgage.
What Is PMI and Why Is It Required?
When you borrow more than 80% of a home’s value (a loan-to-value ratio above 80%), lenders consider the loan higher risk. PMI is insurance that compensates the lender if you stop making payments and they take a loss on the foreclosure. It is required on conventional loans with less than 20% down and is typically arranged by the lender through a private insurance company.
PMI is not the same as homeowner’s insurance (which protects your home and belongings) or mortgage protection insurance (which pays your mortgage if you die or become disabled). PMI exists solely to protect the lender’s financial interest.
How Much Does PMI Cost?
PMI typically costs between 0.5% and 1.5% of the original loan amount per year, depending on your down payment size, credit score, and loan type. On a $350,000 loan, that translates to roughly $145–$438 per month added to your mortgage payment.
Factors that affect your PMI rate:
- Down payment size: A 10% down payment costs more than a 15% down payment in PMI.
- Credit score: Higher credit scores get lower PMI rates.
- Loan type: Fixed-rate loans generally cost less in PMI than adjustable-rate mortgages.
- Loan term: 30-year loans typically have higher PMI rates than 15-year loans.
How PMI Is Paid
The most common structure is monthly PMI added to your mortgage payment. Other structures include:
- Single-premium PMI: A lump sum paid upfront at closing. Higher upfront cost, no monthly PMI. Can make sense if you plan to stay long-term.
- Lender-paid PMI (LPMI): The lender pays the PMI premium but charges you a higher interest rate. PMI effectively never cancels because the rate is baked into your loan permanently.
- Split-premium PMI: A combination — part paid upfront, part monthly.
When Does PMI Go Away?
The Homeowners Protection Act gives you two paths to remove PMI on a conventional loan:
- Automatic cancellation: When your loan balance reaches 78% of the original purchase price, your lender must automatically cancel PMI — as long as your payments are current.
- Borrower-requested cancellation: Once your loan balance reaches 80% of the original purchase price, you can request cancellation in writing. The lender may require an appraisal to confirm the home has not declined in value.
If your home has appreciated significantly, you may be able to request PMI removal based on current market value (at 80% LTV) rather than the original purchase price — though lenders typically require a formal appraisal and that you have been current for two years.
PMI on Government-Backed Loans
FHA loans have their own version called mortgage insurance premium (MIP), which works differently. FHA MIP is required regardless of your down payment and, if you put down less than 10%, it remains for the life of the loan. VA loans and USDA loans do not require PMI but have their own upfront funding fees.
How to Avoid PMI
- Put 20% down. The most straightforward route.
- Piggyback loan (80-10-10): Take a first mortgage for 80%, a second mortgage (home equity loan) for 10%, and put 10% down. No PMI required on the first mortgage.
- Choose a no-PMI loan product: Some lenders offer special programs for certain buyers (professionals, first-time buyers) that waive PMI requirements.
Bottom Line
PMI is a real cost that adds hundreds of dollars per month to homeownership until you reach 20% equity. If you cannot put 20% down, understand exactly what your PMI will cost, how it is structured, and when you can cancel it. Actively track your loan balance and home value so you can request removal as soon as you are eligible — every month without PMI is money back in your pocket.