PMI stands for private mortgage insurance. Lenders require it when you put down less than 20% on a conventional mortgage. It protects the lender, not you, if you stop making payments and the loan goes into foreclosure.
It adds to your monthly payment until you build enough equity to cancel it.
Why PMI Exists
From a lender’s perspective, borrowers who put down less than 20% have less skin in the game. If the borrower defaults early in the loan when little equity has been built, the lender could lose money selling the home. PMI covers that gap.
PMI is an insurance policy the lender purchases, but the borrower pays the premium. It’s not optional when required, if you want the loan, you pay for PMI.
What PMI Costs
PMI typically costs between 0.5% and 1.5% of the original loan amount per year, depending on your credit score, loan-to-value ratio, and the insurer.
On a $300,000 loan:
- 0.5% PMI = $1,500 per year → $125/month
- 1% PMI = $3,000 per year → $250/month
- 1.5% PMI = $4,500 per year → $375/month
PMI appears as a line item on your monthly mortgage statement. It’s not the same as homeowners insurance, which protects your property, not the lender’s loan.
PMI vs MIP
PMI applies to conventional loans. FHA loans have a similar cost called MIP, mortgage insurance premium.
MIP works differently: there’s an upfront premium (currently 1.75% of the loan, rolled into the loan balance) plus an annual premium paid monthly. For most FHA loans, MIP lasts for the life of the loan, it cannot be canceled by reaching 20% equity the way PMI can.
If you’re choosing between an FHA loan and a conventional loan, compare the long-term cost of MIP vs PMI based on how long you plan to stay.
How to Cancel PMI
Automatic cancellation: Under federal law (the Homeowners Protection Act), your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price, meaning your LTV drops to 78% based on your original amortization schedule.
Requesting cancellation at 80%: You can request cancellation once your balance falls to 80% of the original purchase price. The lender may require a current appraisal to confirm the home hasn’t lost value. You generally also need a good payment history.
Appraisal-based cancellation: If your home has appreciated significantly, you can order an appraisal and ask the lender to cancel PMI based on the new value rather than the original purchase price. Lenders aren’t always required to grant this, and policies vary. Refinancing may be another path to removing PMI if you’ve built enough equity.
Refinancing: If your home value has risen enough that a new loan would be at 80% LTV or less, refinancing removes the PMI entirely, though refinancing has its own costs and resets the loan term.
Lender-Paid PMI
Some lenders offer lender-paid PMI, where the lender covers the insurance premium in exchange for a slightly higher interest rate on your loan. This eliminates the monthly PMI line item but may cost more over time through higher interest.
Whether lender-paid PMI makes sense depends on how long you plan to stay. If you’ll sell or refinance in a few years, a higher rate for a short period may be cheaper than monthly PMI. If you stay long-term, the higher rate likely costs more.
VA and USDA Loans: No PMI
Two government-backed loan programs eliminate PMI entirely:
VA loans are available to eligible veterans, active-duty service members, and surviving spouses. They require no down payment and no PMI. There’s a one-time funding fee (currently 1.25% to 3.3% of the loan amount depending on service history and down payment), but no ongoing monthly mortgage insurance premium. For those who qualify, VA loans are typically the most cost-effective mortgage available.
USDA loans are available for homes in eligible rural and suburban areas to borrowers who meet income limits. They require no down payment and charge an upfront guarantee fee plus a small annual fee, but no traditional PMI.
If you’re eligible for either program, compare total costs against a conventional loan with PMI before deciding.
The PMI Math: Buying Now vs Waiting to Save 20%
The instinct to avoid PMI by saving a full 20% down payment is understandable, but the math doesn’t always support waiting.
Example: Suppose homes in your area are priced at $350,000. A 20% down payment is $70,000. If you currently have $35,000 saved and can save $1,000 per month, it would take roughly three years to reach the $70,000 target, assuming prices stay flat.
If home prices rise 4% per year during those three years, the same home would cost approximately $393,000 by the time you have the larger down payment. Your effective cost increased, and you paid rent in the interim.
The alternative: buy now with 10% down ($35,000), accept PMI of approximately $150 to $200 per month, and cancel PMI once you reach 20% equity, which might happen in three to five years through payments and appreciation.
Whether waiting saves money depends on:
- How fast home prices are rising in your market
- What rent you would pay in the meantime
- How quickly you can build equity and cancel PMI
- Whether rates are likely to change
In a flat or slow-appreciating market with low rents, waiting may be advantageous. In a fast-moving market, paying PMI temporarily can cost far less than being priced out entirely.
PMI and Your Down Payment Decision
PMI is a cost of putting down less than 20%, but it’s not always the wrong choice. Waiting to save 20% while renting can mean missing years of equity building and appreciation, or paying high rent in a rising market. The math depends on your local market and timeline. For more on the full cost comparison, see Renting vs Buying a Home and How Much Should I Save for a House Down Payment?
Frequently Asked Questions
Q: Is PMI tax-deductible?
PMI deductibility has varied under tax law and has had periods of expiration. Check IRS Publication 936 or consult a tax professional for the current year’s rules.
Q: Does PMI protect me if I lose my job?
No. PMI protects the lender if you default. It provides no benefit to you as the borrower. If you lose your job and can’t pay, PMI pays the lender after foreclosure, it doesn’t cover your payments.
Q: Can I avoid PMI with a second loan?
Some buyers use a piggyback loan, a second mortgage that covers part of the down payment, to reach 20% equity on the first loan and avoid PMI. This is called an 80/10/10 structure (80% first mortgage, 10% second mortgage, 10% down payment). The second loan has its own interest rate and payment. Whether it saves money compared to PMI depends on the rates and terms.