Private mortgage insurance, commonly called PMI, is an insurance policy that protects your lender if you stop making payments on your home loan. You’ll typically need to pay for it when you take out a conventional mortgage with a down payment of less than 20 percent. Despite the fact that you’re the one paying the premiums, PMI doesn’t protect you at all. It covers the lender’s losses if you default.
Why Lenders Require PMI
When you put down less than 20 percent on a home, the lender takes on more risk. You’re borrowing a larger share of the property’s value, which means if you fall behind on payments and the lender has to foreclose, there’s a greater chance the sale won’t cover what you owe. PMI offsets that risk by reimbursing the lender for a portion of the loss.
The same requirement applies when you refinance a conventional loan and your equity is less than 20 percent of your home’s value. So even if you’ve owned the home for years, a refinance can trigger PMI if you haven’t built enough equity.
How Much PMI Costs
PMI premiums typically range from 0.46% to 1.50% of the original loan amount per year, according to the Urban Institute’s Housing Finance Policy Center. On a $300,000 loan, that works out to roughly $115 to $375 per month added to your mortgage payment. The exact amount depends heavily on your credit score and the size of your down payment.
Borrowers with lower credit scores pay significantly more. Here’s how average annual PMI rates break down by score:
- 680 to 699: 0.98% of the loan amount per year
- 660 to 679: 1.23%
- 640 to 659: 1.31%
- 620 to 639: 1.50%
A borrower with a 690 credit score on that same $300,000 loan would pay about $2,940 per year, or $245 per month. Someone with a 630 score would pay closer to $4,500 per year, or $375 monthly. That difference of $130 a month adds up to more than $1,500 a year, which is a strong incentive to improve your credit before buying if you can.
Most PMI is paid monthly as part of your mortgage payment, with no upfront cost. Some lenders offer a single upfront premium option, but the monthly structure is far more common.
How to Get Rid of PMI
Unlike some costs baked into homeownership, PMI is temporary. Federal law, specifically the Homeowners Protection Act, gives you two paths to eliminate it on conventional loans.
The first is borrower-requested cancellation. Once your loan balance drops to 80 percent of your home’s original value (meaning you have 20 percent equity), you can submit a written request to your lender to cancel PMI. To qualify, you need to be current on your payments, have a good payment history, and provide evidence that your property hasn’t lost value. Your lender may require an appraisal at your expense to confirm this. You also can’t have a second lien, like a home equity loan, on the property.
The second path is automatic termination. Your lender is required by law to cancel PMI once your loan balance is scheduled to reach 78 percent of the original value, based on your amortization schedule. This happens automatically as long as you’re current on payments. If you’re behind at that point, PMI drops off on the first day of the month after you catch up. Note that automatic termination uses the original purchase price or appraised value at closing, not your home’s current market value.
The practical difference between these two options matters. If your home has appreciated and you’ve been making steady payments, you could hit 20 percent equity well before your amortization schedule reaches that milestone. In that case, requesting cancellation early saves you months or even years of premiums.
PMI vs. FHA Mortgage Insurance
PMI applies only to conventional loans. If you have an FHA loan, you pay a different type of mortgage insurance called MIP (mortgage insurance premium), and the rules are quite different.
FHA loans charge an upfront mortgage insurance premium of 1.75% of the loan amount, paid at closing. On a $300,000 loan, that’s $5,250 right out of the gate. You also pay an annual premium ranging from 0.15% to 0.75%, depending on your loan term, loan size, and down payment.
The biggest difference is duration. PMI can be canceled once you reach 20 percent equity. FHA mortgage insurance is much harder to shed. If you make a down payment of at least 10 percent, MIP lasts 11 years. With anything less than 10 percent down (which is most FHA borrowers), MIP stays for the life of the loan. The only way to eliminate it early is to refinance into a conventional loan once you have enough equity.
This is a major reason some borrowers choose conventional loans even when they qualify for FHA financing. Although FHA loans have more lenient credit requirements, the permanent mortgage insurance can cost more over time than PMI that drops off after a few years.
Alternatives to Paying PMI
If you want to avoid PMI but don’t have a full 20 percent down payment, a few strategies exist.
A piggyback loan, also called an 80-10-10 structure, uses two mortgages at once. You take out a primary mortgage for 80 percent of the home’s value, a second loan (typically a home equity loan or HELOC) for 10 percent, and put 10 percent down yourself. Because the primary mortgage is only 80 percent of the value, no PMI is required. The catch is that the second loan usually carries a higher interest rate, often adjustable. Before going this route, compare the total cost of both loans against a single mortgage with PMI. In some cases, PMI is actually cheaper. Piggyback structures can also make refinancing more complicated later, since both lenders need to agree to any changes.
Lender-paid mortgage insurance (LPMI) is another option. Your lender covers the PMI cost in exchange for charging you a higher interest rate on the loan. This lowers your monthly payment compared to paying PMI separately, but the higher rate lasts the life of the loan. With borrower-paid PMI, you eventually get rid of it. With LPMI, you’re stuck with the higher rate unless you refinance. This can work well if you plan to sell or refinance within a few years, but it costs more over a long holding period.
The most straightforward alternative is simply saving for a larger down payment. Waiting to hit the 20 percent threshold eliminates PMI entirely and reduces your loan amount. Of course, in a rising market, the cost of waiting (higher home prices) can outweigh the PMI savings. Running the numbers for your specific situation is the only way to know which approach costs less overall.