Private mortgage insurance — PMI — is an extra monthly cost that many homebuyers face when they put less than 20% down on a conventional mortgage. It protects the lender, not you, if you stop making payments.
Understanding how PMI works — and how to get rid of it — can save you thousands of dollars over the life of your loan.
Why Lenders Require PMI
When you put less than 20% down, lenders consider the loan higher risk. PMI insures the lender against a shortfall if you default and the home declines in value.
How Much Does PMI Cost?
PMI typically costs between 0.5% and 1.5% of the loan amount per year.
Example:
- Loan amount: $350,000
- PMI rate: 0.8% per year
- Annual PMI cost: $2,800
- Monthly PMI cost: $233 per month
Types of PMI
Borrower-Paid PMI (BPMI)
The most common type. Added to your monthly mortgage payment. Cancels automatically when you reach 22% equity under the Homeowners Protection Act.
Lender-Paid PMI (LPMI)
The lender pays PMI upfront and charges you a slightly higher interest rate. The higher rate is permanent — you cannot cancel LPMI when you reach 20% equity.
Single-Premium PMI
You pay the entire PMI cost upfront at closing in a lump sum.
When Can You Cancel PMI?
Under the Homeowners Protection Act:
- Automatic cancellation: When your loan balance reaches 78% of the original home value (22% equity).
- Upon request: When your balance reaches 80% of the original value — provided you have a good payment history.
How to Request Early PMI Cancellation
- Contact your loan servicer in writing and request cancellation.
- The lender may require a new appraisal to verify current value.
- If the appraisal supports 20%+ equity, PMI cancellation is approved.
How to Avoid PMI Altogether
Put 20% Down
The simplest solution — no PMI if you have 20% of the purchase price.
Piggyback Loan (80-10-10)
Two simultaneous loans: one for 80% (no PMI), one for 10%, with 10% down. Works best when the combined rate beats a single low-down-payment loan with PMI.
VA Loans
Eligible veterans can get VA loans with no down payment and no PMI.
USDA Loans
USDA loans for rural properties have no PMI requirement (they charge a guarantee fee instead).
Is PMI Worth It?
PMI is often worth paying if the alternative is waiting years to save a larger down payment. In appreciating markets, buying sooner with PMI is frequently the better financial decision. Once you reach 20% equity, cancel it immediately.
Bottom Line
PMI is a cost of buying a home with less than 20% down — not a permanent part of your payment. Know when you can cancel it, track your equity, and request cancellation as soon as you qualify.