Private mortgage insurance (PMI) is one of those costs that catches many first-time buyers off guard. If you put less than 20% down on a conventional loan, your lender will require PMI — insurance that protects the lender (not you) if you default. Understanding how it works, what it costs, and how to get rid of it can save you thousands of dollars.
What Is PMI?
PMI is insurance that protects mortgage lenders against losses if a borrower defaults on their loan. When you put less than 20% down, lenders consider you a higher risk — you have less equity in the home and therefore more incentive to walk away if values drop or your situation changes. PMI compensates the lender for that additional risk.
Note: PMI is specific to conventional loans. FHA loans have their own mortgage insurance (called MIP), VA loans and USDA loans do not require mortgage insurance in the traditional sense (VA has a funding fee; USDA has a guarantee fee).
How Much Does PMI Cost?
PMI typically costs 0.1% to 2% of the loan amount per year, depending on:
- Your credit score (higher score = lower PMI rate)
- Your loan-to-value ratio (more down payment = lower PMI)
- Loan type and term
- PMI provider the lender uses
For a $300,000 loan, PMI of 0.7% annually equals $2,100/year, or $175/month added to your mortgage payment. The rates are not fixed — they vary based on your specific risk profile.
Types of PMI
Borrower-Paid PMI (BPMI)
The most common type. Added to your monthly mortgage payment. Automatically cancels when loan balance reaches 78% of original value; you can request cancellation at 80%.
Lender-Paid PMI (LPMI)
The lender pays the PMI premium in exchange for a slightly higher interest rate. You do not pay a separate PMI line item, but the higher rate lasts for the life of the loan. This can be a good deal if you plan to sell or refinance within a few years.
Single-Premium PMI
You pay the entire PMI premium upfront at closing (as a lump sum). No ongoing monthly cost. This reduces your monthly payment but requires more cash at closing. Makes sense if you plan to stay long-term.
Split-Premium PMI
A combination — you pay some upfront and a reduced monthly amount. Less common.
When Does PMI Cancel?
The Homeowners Protection Act gives you specific rights regarding PMI cancellation on conventional loans:
- Automatic cancellation: PMI must automatically cancel when your loan balance reaches 78% of the original purchase price (as long as you are current on payments)
- Requested cancellation: You can request cancellation when you reach 80% LTV based on original value. The lender may require a good payment history and a new appraisal confirming the value has not declined.
- Appreciation-based cancellation: If home values rise and you reach 80% LTV based on current appraised value sooner, you can request cancellation. The lender may require an appraisal at your expense.
For a $300,000 home with a $285,000 loan (5% down), automatic PMI cancellation triggers when the balance drops to $240,000 (80% of original $300,000). At a normal amortization pace, that takes about 9-10 years without extra payments.
Strategies to Avoid PMI
Put 20% Down
The most straightforward approach. No PMI, lower monthly payment, lower interest rate. The trade-off is accumulating a larger down payment — which takes time and means potentially buying later.
Piggyback Loan (80/10/10)
This involves taking out two loans simultaneously: a primary mortgage at 80% LTV and a second mortgage (HELOC or home equity loan) for 10%, leaving you to provide 10% down. The primary loan has no PMI because it is at exactly 80% LTV.
The downside: second mortgages typically carry higher rates than first mortgages. You need to compare the combined cost of two loans versus PMI.
Lender-Paid PMI
Accept a slightly higher interest rate in exchange for no monthly PMI. This can make sense if you expect to sell or refinance within 5-7 years before the higher rate’s cumulative cost exceeds what PMI would have cost.
VA Loans
Veterans, active-duty service members, and eligible surviving spouses qualify for VA loans with no down payment and no PMI. There is a one-time funding fee, but it is typically lower than years of PMI payments.
Make Extra Payments to Reach 20% Equity Faster
If you are already in a loan with PMI, applying extra principal payments can accelerate your timeline to the 80% LTV threshold, allowing you to request PMI cancellation earlier.
PMI vs. FHA MIP: Which Is More Expensive?
This comparison matters because choosing FHA over conventional (or vice versa) affects how long you pay mortgage insurance:
- Conventional PMI: Cancels when you reach 80% LTV — typically in 9-12 years at a normal pace, or faster with extra payments or appreciation
- FHA MIP: For loans with less than 10% down, never cancels — it lasts the entire loan term
A buyer with a 680 credit score putting 5% down on a $300,000 home will often pay less total mortgage insurance with a conventional loan (PMI that eventually cancels) than an FHA loan (MIP that never cancels), even though the monthly MIP might be slightly lower initially.
Bottom Line
PMI is not a permanent cost — it is a temporary expense to cross the threshold into homeownership when you cannot put 20% down. Understanding how and when it cancels, and exploring strategies to avoid or minimize it, is part of smart home buying. If you are close to 20% down, the math often favors waiting a bit longer to reach that threshold. If you are far from 20% and have found the right home, PMI may be worth paying to get into the market now.