If you're buying a home with less than a 20% down payment, you've likely encountered the term PMI, or Private Mortgage Insurance. For many buyers, it feels like an annoying "extra fee" that doesn't actually help them. In a sense, that's true—PMI protects the lender, not you. However, without PMI, many people wouldn't be able to buy a home at all. This guide explains the mechanics of PMI and how you can eventually stop paying it.
Understanding PMI is a key part of mastering your monthly mortgage calculation.
What Exactly is PMI?
Private Mortgage Insurance is a type of insurance required by lenders for conventional loans when the borrower provides a down payment of less than 20% of the home's purchase price. If you default on your loan and the home is foreclosed, the PMI policy pays out to the lender to cover the loss they incur by having lent to someone with less "skin in the game."
How Much Does PMI Cost?
The cost of PMI isn't a flat fee. It usually ranges from 0.22% to 2.25% of your original loan amount each year. Several factors influence where you land on that scale:
- Loan-to-Value (LTV) Ratio: Putting 3% down (97% LTV) is riskier than putting 10% down (90% LTV), so your PMI rate will be higher.
- Credit Score: As we discussed in our interest rate guide, a higher credit score signals lower risk, which can significantly lower your PMI premium.
- Loan Type: Fixed-rate mortgages often have lower PMI costs than adjustable-rate mortgages.
On a $350,000 loan, a 1% PMI rate would cost you roughly $291 per month. That’s nearly $3,500 a year that doesn't go toward your principal or interest.
"Think of PMI as a convenience fee. It's the price you pay for the ability to buy a home today rather than waiting years to save a massive down payment."
How to Get Rid of PMI
The good news is that unlike your property taxes, PMI is not permanent. There are three ways to stop paying it:
1. Automatic Cancellation
Under the Homeowners Protection Act, your lender must automatically cancel PMI when your loan balance is scheduled to reach 78% of the original value of your home, provided you are current on your payments.
2. Requesting Cancellation
You can ask your lender to cancel PMI several years earlier—as soon as your balance drops to 80% of the original value. You must make this request in writing and have a good payment history.
3. Re-Appraisal Due to Market Gains
If home values in your neighborhood have skyrocketed, you might reach 20% equity much faster than your amortization schedule predicts. Most lenders will allow you to order a new appraisal (at your expense) to prove your equity is now above 20%. If it is, they can drop the PMI immediately.
Strategies to Avoid PMI from the Start
If you hate the idea of paying for a policy that doesn't benefit you, consider these alternatives:
- Wait and Save: The most obvious path—save until you hit 20%.
- Piggyback Loans (80/10/10): You take a primary mortgage for 80%, a second mortgage for 10%, and put 10% down. Since the primary loan is only 80% LTV, there is no PMI.
- Lender-Paid Mortgage Insurance (LPMI): The lender pays the PMI in exchange for a slightly higher interest rate. This can sometimes be cheaper over the long run, but the higher rate is permanent, unlike PMI.
- VA Loans: If you are a veteran or active-duty service member, VA loans require 0% down and have no monthly mortgage insurance.
PMI vs. MIP (FHA Loans)
It's important to note that PMI is for conventional loans. FHA loans have their own version called MIP (Mortgage Insurance Premium). Unlike conventional PMI, FHA insurance usually lasts for the entire life of the loan if you put down less than 10%. To get rid of FHA insurance, you typically have to refinance into a conventional loan once you hit 20% equity.
Conclusion
PMI is a tool that opens the door to homeownership for millions of Americans who don't have six figures sitting in a savings account. By understanding how it's calculated and how to get it cancelled, you can ensure you only pay it for as long as absolutely necessary.
Want to see how PMI affects your monthly payment? Use our main mortgage calculator and adjust the down payment to see the insurance premium appear and disappear.