What is PMI (Private Mortgage Insurance)
PMI (private mortgage insurance) is a monthly fee added to conventional mortgage payments when the buyer puts down less than 20% — it protects the lender (not the borrower) against default and is cancelable once sufficient equity is reached.
Private mortgage insurance (PMI) is a type of insurance required on most conventional mortgage loans when the borrower puts down less than 20% of the home's purchase price. Despite the name, PMI protects the lender, not you — it reimburses the lender if you default and the foreclosure sale doesn't cover the remaining loan balance.
PMI adds a meaningful cost to your monthly payment and is something most homebuyers aim to eliminate as soon as possible.
How Much Does PMI Cost?
PMI typically costs 0.5% to 1.5% of the original loan amount per year, though the rate varies based on your credit score, down payment amount, and loan type.
Annual PMI cost examples (on a $350,000 loan):
- At 0.5% = $1,750/year = $146/month
- At 1.0% = $3,500/year = $292/month
- At 1.5% = $5,250/year = $437/month
Over the years before you reach 20% equity, this cost adds up to thousands of dollars paid solely to protect your lender. The higher your credit score and the larger your down payment, the lower your PMI rate.
When PMI Can Be Removed
By law (under the Homeowners Protection Act), borrowers can request PMI cancellation once their loan balance reaches 80% of the original appraised value — meaning they have 20% equity. The lender is required to automatically cancel PMI when the balance reaches 78% of the original value, based on the original amortization schedule.
Strategies to remove PMI faster:
- Make extra principal payments to reach 20% equity sooner
- Request a new appraisal if your home's value has increased — if you now have 20%+ equity based on current value, you can request removal (subject to lender guidelines, often requiring 2 years of on-time payments)
PMI vs. MIP (FHA Mortgage Insurance Premium)
PMI is specific to conventional loans. FHA loans have their own equivalent called a Mortgage Insurance Premium (MIP) — and it works differently:
| PMI (Conventional) | MIP (FHA) | |
|---|---|---|
| Cancelable? | Yes, at 20% equity | Often for life of loan (if <10% down) |
| Cost | 0.5–1.5%/year | 0.55–1.05%/year (plus 1.75% upfront) |
| Based on current value? | Can be removed via appraisal | Cannot be removed without refinancing |
| Who qualifies | Any conventional borrower | FHA borrowers only |
FHA's mortgage insurance is often harder to escape — many FHA borrowers end up refinancing into a conventional loan once they reach 20% equity just to shed the MIP.
How to Avoid PMI
If you want to avoid PMI entirely from the start:
- Put 20% or more down — the most straightforward solution
- 80/10/10 piggyback loan — a first mortgage for 80%, a second loan (like a HELOC) for 10%, and 10% down. Avoids PMI but the second loan carries its own interest rate
- Lender-paid PMI (LPMI) — the lender covers PMI in exchange for a higher interest rate. The trade-off: you can't cancel it and you're stuck with the higher rate until you refinance
- VA or USDA loans — for eligible borrowers, these government-backed programs require no down payment and no PMI
Is It Better to Put 20% Down or Pay PMI?
This depends on your opportunity cost. If you have exactly 20% saved but would be left with little cash reserve, it may be better to put less down, pay PMI, and keep an emergency fund. Depleting all savings to avoid PMI and then facing an unexpected repair can force expensive high-interest borrowing.
Run the numbers for your situation: compare the annual cost of PMI to what the difference in down payment could earn if invested at a conservative return. The right answer varies based on your interest rate environment, investment horizon, and personal risk tolerance.