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Tag: private mortgage insurance

  • What Is PMI? Private Mortgage Insurance Explained

    If you buy a home with less than a 20% down payment, your lender will likely require you to pay private mortgage insurance (PMI). It adds to your monthly housing cost, but it also makes homeownership possible without a large down payment.

    This guide explains what PMI is, how much it costs, and how to get rid of it.

    What Is PMI?

    PMI is insurance that protects the lender — not you — if you stop making mortgage payments and the home goes into foreclosure. Because a borrower with less than 20% equity poses more risk to the lender, the lender requires PMI to offset that risk.

    PMI is added to your monthly mortgage payment. It is not a permanent cost. Once you build enough equity, you can have it removed.

    How Much Does PMI Cost?

    PMI typically costs between 0.5% and 1.5% of your loan amount per year. On a $300,000 mortgage, that is $1,500 to $4,500 per year, or $125 to $375 per month.

    The exact rate depends on your down payment percentage, credit score, loan type, and lender. A higher credit score and a larger down payment usually mean a lower PMI rate.

    When Is PMI Required?

    PMI is typically required when:

    • Your down payment is less than 20% of the home’s purchase price
    • You have a conventional loan (not FHA, VA, or USDA)

    Government-backed loans have their own versions of mortgage insurance:

    • FHA loans require a mortgage insurance premium (MIP), which works similarly to PMI but has different rules and costs.
    • VA loans do not require PMI. They charge a one-time funding fee instead.
    • USDA loans charge an annual guarantee fee instead of PMI.

    Types of PMI

    There are several ways PMI can be structured:

    Borrower-Paid PMI (BPMI)

    This is the most common type. You pay a monthly premium added to your mortgage payment. It automatically cancels once you reach 22% equity.

    Lender-Paid PMI (LPMI)

    The lender pays the PMI premium in exchange for a slightly higher interest rate on your mortgage. You do not have a separate PMI line item, but you pay more in interest for the life of the loan. You cannot cancel this type — the higher rate is permanent unless you refinance.

    Single-Premium PMI

    You pay the full PMI cost upfront at closing as a lump sum. This removes the monthly PMI payment but requires more cash at closing.

    Split-Premium PMI

    You pay part of the PMI upfront and part monthly. This reduces the ongoing monthly payment.

    How to Get Rid of PMI

    The Homeowners Protection Act gives borrowers rights to cancel PMI on conventional loans.

    Automatic Cancellation

    Lenders are legally required to automatically cancel BPMI once your loan balance reaches 78% of the original purchase price, based on your payment schedule. This happens automatically — you do not need to request it.

    Request Cancellation at 80% LTV

    You can request PMI cancellation once your loan balance falls to 80% of the original purchase price. You must have a good payment history and may need a new appraisal to confirm the home’s value. Contact your loan servicer in writing to start the process.

    New Appraisal to Cancel Early

    If your home has increased in value significantly, you may be able to cancel PMI before reaching 20% equity based on your original purchase price. The new appraised value establishes a new baseline, and you may already be at or below 80% loan-to-value (LTV) based on the higher value.

    Refinance

    If home values have risen and you have paid down some principal, refinancing into a new loan with at least 20% equity eliminates PMI. This works best when refinancing also lowers your interest rate enough to justify the closing costs.

    PMI vs. MIP: What Is the Difference?

    PMI applies to conventional loans. MIP (mortgage insurance premium) applies to FHA loans. The key difference is that FHA MIP is harder to remove.

    For FHA loans originated after June 2013 with a down payment below 10%, MIP lasts for the life of the loan. The only way to get rid of it is to refinance into a conventional loan once you have 20% equity.

    If you are choosing between an FHA and conventional loan with PMI, run the numbers on the long-term cost of each. If you plan to stay in the home long-term and will reach 20% equity, a conventional loan with PMI may cost less over time.

    Is PMI Worth It?

    PMI adds to your housing cost, but it may still make sense to buy with less than 20% down, especially if:

    • Home prices are rising and waiting would cost you more
    • Your rent is comparable to or higher than what you would pay with PMI
    • You have an emergency fund and stable income but not a 20% down payment saved yet

    PMI is not forever. Once you hit 20% equity, the cost goes away. Think of it as the price of entry into homeownership earlier.

    How to Minimize PMI Costs

    • Improve your credit score before applying. A higher score usually means a lower PMI rate.
    • Make extra payments to build equity faster.
    • Track your home’s value. If it rises sharply, request an appraisal and ask for early cancellation.
    • Compare lender-paid vs. borrower-paid PMI. If you plan to sell or refinance within a few years, lender-paid PMI might cost less overall.

    Related Articles

    Related: How to Save for a Down Payment on a House in 2026

  • What Is Private Mortgage Insurance (PMI)? 2026 Rates and How to Avoid It

    Private mortgage insurance (PMI) is a fee many homebuyers pay when they cannot put 20% down on a conventional mortgage. It protects the lender — not you — if you default on the loan. Most borrowers want to eliminate PMI as quickly as possible, and understanding how it works is the first step.

    What Is PMI?

    PMI is insurance required by most conventional mortgage lenders when a borrower’s down payment is less than 20% of the home’s purchase price. The premium is added to your monthly mortgage payment (or paid upfront, depending on the structure).

    PMI exists because lenders consider low-down-payment borrowers higher risk. The insurance compensates the lender if you stop making payments and they have to foreclose.

    How Much Does PMI Cost?

    PMI typically costs 0.2% to 2% of your loan amount annually, depending on your credit score, loan-to-value ratio, and loan type. The premium is added to your monthly mortgage payment.

    Example:

    • Home price: $350,000
    • Down payment: 10% ($35,000)
    • Loan amount: $315,000
    • PMI rate: 0.7% annually
    • Annual PMI cost: $2,205
    • Monthly PMI payment: ~$184

    As a general estimate:

    • Credit score above 760 + 10% down: approximately 0.20%–0.50% of loan value
    • Credit score 700–759 + 5% down: approximately 0.50%–1.00%
    • Credit score below 700 + 5% down: approximately 1.00%–2.00%

    Types of PMI

    Borrower-Paid PMI (BPMI)

    The most common type. The monthly premium is added to your mortgage payment until you reach 20% equity. This is automatically cancelled when you reach 22% equity based on the original purchase price.

    Single-Premium PMI (SPMI)

    You pay the entire PMI premium upfront at closing. Monthly payments are lower, but you lose the upfront amount if you refinance or sell before building significant equity.

    Lender-Paid PMI (LPMI)

    The lender pays the PMI premium in exchange for a higher interest rate on your loan. There is no separate PMI line item, but you pay a higher rate for the life of the loan — even after you would have otherwise cancelled BPMI. This is often the more expensive option long-term.

    Split-Premium PMI

    A hybrid approach where you pay part upfront and part monthly. It reduces monthly costs without requiring the full upfront premium.

    How Long Do You Pay PMI?

    Under the Homeowners Protection Act (HPA), lenders must automatically cancel borrower-paid PMI when your loan balance reaches 78% of the original purchase price (i.e., 22% equity), based on your scheduled payment timeline.

    You can also request cancellation when your loan balance reaches 80% of the original purchase price (20% equity). To do this, you must:

    • Have a good payment history (no payments 30+ days late in the past year)
    • Request cancellation in writing
    • Confirm your property value has not declined (lender may require an appraisal)

    How to Avoid PMI

    Put 20% Down

    The simplest solution: save a 20% down payment before buying. On a $350,000 home, that is $70,000. This eliminates PMI entirely and reduces your loan balance, which lowers your monthly payment.

    Piggyback Loan (80/10/10)

    Take out a primary mortgage for 80% of the purchase price, a second mortgage (home equity loan or HELOC) for 10%, and put 10% down yourself. The primary mortgage stays at 80% LTV, which avoids PMI. The second mortgage has a higher rate, but may cost less than PMI depending on the amounts and rates involved.

    Lender-Paid PMI

    As mentioned, the lender absorbs the PMI premium in exchange for a higher interest rate. This eliminates the monthly PMI line item but adds cost via a permanently higher rate. Run the math over your expected ownership period before choosing this option.

    VA Loans (for Eligible Borrowers)

    VA loans, available to veterans and active military, require no down payment and no PMI. The VA funding fee is a one-time charge that is often less than years of PMI payments.

    USDA Loans

    USDA loans (for eligible rural and suburban properties) have no PMI but do charge an annual guarantee fee (currently 0.35% of the outstanding balance), which is lower than conventional PMI in most cases.

    How to Remove PMI Early

    You do not have to wait for automatic cancellation. There are two ways to speed up the process:

    Make Extra Principal Payments

    Every extra dollar applied to your principal reduces your loan balance and gets you to 80% LTV faster. Even modest extra payments each month can shave months or years off your PMI timeline.

    Get a New Appraisal

    If your home has appreciated significantly since purchase, a new appraisal may show you have already reached 80% LTV based on current value (not original purchase price). Many lenders allow PMI cancellation based on appraised value if:

    • You have owned the home for at least 2 years, OR
    • You have owned it for at least 5 years and the value has increased enough to put you at 80% LTV

    An appraisal costs $300–$600 but can save thousands in PMI if your home has appreciated.

    PMI vs. MIP: What Is the Difference?

    PMI is for conventional loans. FHA loans have their own version called Mortgage Insurance Premium (MIP). There are key differences:

    • MIP includes both an upfront premium (1.75% of the loan amount) and an annual premium (0.55%–1.05%)
    • For FHA loans with less than 10% down, MIP lasts the life of the loan — it cannot be cancelled the way PMI can
    • For FHA loans with 10% or more down, MIP drops off after 11 years

    This is a significant long-term cost of FHA loans. Borrowers who can qualify for a conventional loan and plan to stay in the home for many years are often better served by a conventional loan with PMI (which can be cancelled) than an FHA loan with permanent MIP.

    Bottom Line

    PMI adds real cost to your monthly mortgage payment, but it is not permanent. The fastest paths to eliminating it are reaching 20% equity through payments and appreciation, making extra principal payments, or getting a new appraisal after your home increases in value. If you are buying soon, run the numbers on whether a 20% down payment, a piggyback loan, or a VA/USDA loan eliminates PMI entirely from the start.