What Is Private Mortgage Insurance (PMI) and How Do You Avoid It?

Private mortgage insurance protects the lender if you stop making payments on your loan. You pay for it every month, but it does nothing for you. Here is how it works and how to get rid of it as fast as possible.

What Is PMI?

Private mortgage insurance is required by most conventional lenders when your down payment is less than 20% of the purchase price. It is designed to protect the lender from loss if you default and the home sells for less than the outstanding loan balance.

PMI costs typically range from 0.2% to 2% of your loan amount per year, depending on your credit score, loan-to-value ratio, and loan term. On a $300,000 mortgage, that is $600 to $6,000 per year, or $50 to $500 added to your monthly payment.

When Is PMI Required?

PMI is required when your loan-to-value ratio exceeds 80%. Loan-to-value ratio is your loan balance divided by the home’s appraised value. If you put 10% down, your LTV starts at 90%, so PMI is required until you build equity to 80% LTV.

How Much Does PMI Cost?

Your specific PMI cost depends on several factors:

Credit score: Higher scores get lower PMI rates. A 760 score might pay 0.2%, while a 620 score might pay 1.5% or more.
Down payment: The closer to 20% you put down, the lower the PMI rate.
Loan type: Fixed-rate mortgages typically have lower PMI than adjustable-rate mortgages.
Loan term: 15-year loans often have lower PMI rates than 30-year loans.

Types of PMI

Monthly PMI

The most common type. PMI is added to your monthly mortgage payment. Once you reach 80% LTV, you can request cancellation.

Single-Premium PMI

You pay the entire PMI cost upfront at closing, either as cash or rolled into the loan. Monthly payments are lower, but you pay more upfront and do not get a refund if you sell or refinance early.

Lender-Paid PMI

The lender pays the PMI premium and charges you a higher interest rate in exchange. Your monthly payment may be similar, but you cannot cancel it by building equity. You would need to refinance to get rid of it. This is often not a good deal over the long term.

Split-Premium PMI

You pay part of the PMI upfront and a lower monthly premium going forward. Can make sense in some situations where you want lower monthly payments but have some cash to bring to closing.

How to Get Rid of PMI

Wait for Automatic Cancellation

Under the Homeowners Protection Act, lenders must automatically cancel PMI when your loan balance reaches 78% of the original purchase price through scheduled payments. This is the floor, and you can do better.

Request Cancellation at 80% LTV

You do not have to wait until the loan automatically reaches 78%. When your loan balance drops to 80% of the original appraised value through your regular payments, you can formally request PMI cancellation in writing. The lender is required to cancel it if you are current on payments and have a good payment history.

Request Cancellation Based on Increased Home Value

If your home has appreciated significantly, you may be able to cancel PMI sooner. Most lenders require you to have had the loan for at least two years, and some require five years. You typically need to pay for a new appraisal, which costs $300 to $600.

If the new appraisal shows your current LTV is at or below 80%, you can request PMI cancellation. This is worth doing in markets where home values have risen quickly.

Make Extra Principal Payments

Any extra money you pay toward your principal lowers your LTV. Even $100 to $200 extra per month can move your cancellation date up by several years.

Refinance

If rates have dropped and your home has appreciated, refinancing to a new loan where your LTV is 80% or less eliminates PMI. This works best when you can lower your rate at the same time so the refinance pays for itself.

How to Avoid PMI When Buying

Put 20% Down

The simplest solution. If you have the savings, putting 20% down eliminates PMI entirely from the start.

Piggyback Loan (80-10-10)

Take out a first mortgage for 80% of the purchase price, a second mortgage for 10%, and put 10% down. Because the first mortgage does not exceed 80% LTV, no PMI is required. The second mortgage usually carries a higher interest rate than the first, so run the numbers to see if this saves money versus paying PMI.

VA Loan

VA loans for veterans and active military do not require PMI regardless of down payment. There is a funding fee, but it is typically much less than years of PMI payments.

USDA Loan

USDA loans also have no PMI, but they do have an annual guarantee fee that functions similarly. The rate is typically lower than conventional PMI.

FHA Mortgage Insurance: A Different Animal

FHA loans require mortgage insurance that is different from conventional PMI. FHA mortgage insurance includes an upfront premium of 1.75% of the loan amount (usually rolled into the loan) plus an annual premium of 0.15% to 0.75% of the loan amount.

The key difference: if you put less than 10% down on an FHA loan, the mortgage insurance lasts for the life of the loan. You cannot cancel it by reaching 80% LTV. To eliminate FHA mortgage insurance, you must refinance to a conventional loan once you have enough equity.

Related: What Is Gap Insurance?