Private Mortgage Insurance (PMI) Explained
What PMI is, who pays it, roughly what it costs and how it can be removed.
If you buy a home with less than 20% down on a conventional loan, your lender will likely require private mortgage insurance, usually shortened to PMI. It adds to your monthly cost, so it is worth understanding how it works before you commit to a purchase.
What PMI does
PMI protects the lender, not you. If a borrower stops making payments and the home is sold for less than what is owed, the insurance covers part of the lender's loss. Because the lender faces more risk when you have little equity, it requires this coverage in exchange for approving a smaller down payment.
When it applies
PMI is generally associated with conventional loans where the loan-to-value ratio is above 80%. Other loan programs, such as government-backed loans, have their own insurance or fee structures with different rules, so ask your lender which applies to your loan type.
What it costs
PMI is often quoted as a yearly percentage of the loan amount, divided into monthly payments. The rate depends on factors such as your credit score, down payment and loan type, so your quote may differ. As an illustration only, a rate of 0.5% a year on a $380,000 loan is $1,900 a year, or about $158 a month. A rate of 1% would be double that, about $317 a month.
How it affects your payment
On a 30-year loan of $380,000 at 6.5%, principal and interest is $2,401.86. Adding an illustrative $158 of PMI brings the payment to roughly $2,560.19 before taxes and insurance. That is a real cost, though it can be a trade-off worth making if it lets you buy sooner.
Ways to pay PMI
- Monthly premiums: the most common, added to your mortgage payment.
- Single premium: paid up front at closing, with no monthly charge.
- Lender-paid: the lender covers it in exchange for a higher interest rate.
How to get rid of it
Under federal law for many conventional loans, you can request cancellation once your balance reaches 80% of the home's original value, if you meet conditions such as a good payment history. It generally ends automatically when the balance reaches 78%. You may also be able to remove it earlier if the home has increased in value, though lenders may require an appraisal. Confirm the exact rules for your loan in your loan documents.
Strategies to avoid or reduce PMI
- Save a larger down payment, up to 20%.
- Improve your credit score before applying to qualify for lower rates.
- Ask lenders about lender-paid options and compare the total cost.
- Make extra principal payments to reach 80% sooner.
Is PMI worth it?
Paying PMI can make sense if waiting to save 20% would take years and home prices or rents are rising. It can also be a poor choice if the premium is high or you have other ways to reach a bigger down payment. Compare the monthly cost of PMI with the cost of waiting.
Do not confuse it with other insurance
PMI is different from homeowners insurance, which protects your property, and from mortgage life or disability insurance, which protects your ability to pay. You still need homeowners insurance even with PMI.
Run the numbers
Use the mortgage calculator and enter an estimated annual PMI amount to see the effect on your total payment, then compare it with the home affordability calculator to see how it changes your price range.
Important
This guide is educational and not individualized financial advice. Loan terms vary by borrower, lender and market, so confirm details in the official disclosure.