What Is PMI?

What is private mortgage insurance (PMI)? PMI is required if your down payment is less than 20%. It allows you to buy a home with a lower down payment but adds extra costs to your mortgage payments.

Updated: December 12, 2024

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Private mortgage insurance is a type of insurance you might encounter when buying a home with a down payment of less than 20%. According to the National Association of Realtors' 2022 report, saving up for a down payment is one of the main obstacles to home buying.

Fortunately, some lenders accept down payments as low as 3%, making homeownership more accessible. However, this often means you'll need to pay PMI, which comes with additional costs. We'll guide you through understanding private mortgage insurance, how much it costs, the factors that affect these costs and ways to manage or avoid PMI.

Key Takeaways

Private mortgage insurance (PMI) is required for loans with down payments of less than 20%, protecting lenders if you default.

PMI is required until you reach 20% equity or the loan balance hits 78% of the home's original value.

You can eliminate PMI by requesting cancellation at 20% equity or making extra mortgage payments to build equity faster.

What Private Mortgage Insurance Is and How It Works

Private mortgage insurance (PMI) is a type of insurance you might need if you take out a conventional loan with a down payment of less than 20% of the purchase price. It also applies when refinancing a conventional loan with less than 20% equity in your home. While PMI can help you qualify for a mortgage with a lower down payment, it does increase the overall cost of your loan.

Lenders arrange PMI through private insurance companies, and it's designed to cover the lender's risk. So, it protects the lender — not you. If you fall behind on your mortgage, you could still face foreclosure.

Fortunately, you don't need to pay PMI for the entire lifetime of your loan. If home values have increased, you can request a new appraisal to see if you have enough equity to eliminate PMI. However, there may be a cost for the assessment. Typically, you can also request your lender cancel PMI once you've paid your mortgage to 80% of your home's original appraised value. Alternatively, PMI will automatically end when your loan balance drops to 78% of the original value.

How Much Private Mortgage Insurance Costs

Understanding how much private mortgage insurance is can help you plan your budget. According to the Urban Institute's March 2024 chartbook, your annual PMI can range from 0.46% to 1.5% of your loan amount. Several factors influence this cost, including your loan type and credit score. Here’s a detailed list:

Loan-to-Value (LTV) Ratio

A higher LTV ratio means you're financing a larger percentage of your home's value, leading to higher PMI costs. The closer your down payment is to 20%, the lower your PMI will be.

Credit Score

Your credit history significantly impacts your PMI rate. Higher credit scores result in lower PMI costs, while lower scores lead to higher charges. For example, a score between 640 and 659 typically results in a PMI that’s 1.5% of your loan amount, while it’s only 0.79% if your credit score falls between 700 and 719.

Loan Type

Adjustable-rate mortgages (ARMs) generally have higher PMI costs than fixed-rate mortgages. The increased risk for lenders with ARMs results in higher insurance premiums.

Down Payment Amount

Putting down 20% or more eliminates the need for PMI. Smaller down payments increase PMI costs, but the closer your down payment is to 20%, the lower your monthly PMI payments will be.

How to Pay for Private Mortgage Insurance

Understanding how to pay for private mortgage insurance can help you manage your mortgage costs effectively. PMI payments can be structured in several ways. Before agreeing to a mortgage, ask lenders what PMI choices they offer. Here are some common payment options:

Payment Option	What It Involves	Additional Information
Monthly	Your annual PMI premium is divided into 12 monthly payments added to your mortgage bill.	Shown on Loan Estimate and Closing Disclosure (page 1, Projected Payments section).
Upfront	You pay for PMI in a lump sum at closing.	Shown on Loan Estimate and Closing Disclosure (page 2, section B). Non-refundable if you move or refinance.
Split Premiums	You pay a portion of PMI upfront and the rest in monthly payments.	Upfront premium shown on Loan Estimate and Closing Disclosure (page 2, section B). Monthly premium on page 1.
Lender-Paid PMI	The lender pays the PMI premium, but you incur higher interest rates.	No way to cancel or eliminate cost over the loan’s life. Usually for borrowers with poor credit.

Understanding your options for paying private mortgage insurance helps you choose the most suitable arrangement. Discuss these options with your lender to find the best fit for your financial situation. You can use MoneyGeek's PMI calculator to get a better sense for how payments might change based on different circumstances.

Private Mortgage Insurance Calculator

Calculate your monthly private mortgage insurance (PMI) premium based on your credit score and down payment.

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How to Get Rid of Private Mortgage Insurance

Learning how to get rid of PMI can save you money and lower your monthly mortgage payments. There are several ways to achieve this, including the following:

1
Automatic Cancellation
Your lender must cancel PMI automatically when your loan balance reaches 78% of the home's original value. This usually happens when you achieve 22% equity. Ensure you are current on your mortgage payments to qualify.
2
Early PMI Cancellation Request
You can request your lender to cancel PMI once you have 20% equity based on the home's original value. A solid payment history and a possible home appraisal are required.
3
Extra Mortgage Payments
Making additional payments towards your mortgage can help you build equity faster. Consider making lump-sum payments or switching to a biweekly payment plan to reach 20% equity sooner.
4
Appraisal for Increased Home Value
If your home’s value has increased due to market conditions or improvements, you might have reached 20% equity. Contact your lender and consider getting an appraisal to verify the current value.
5
Refinancing
Refinancing your mortgage can eliminate PMI if your equity reaches 20%. Ensure you avoid cash-out refinancing to maintain your equity. Some lenders also offer PMI-free options with higher interest rates.

How to Avoid Private Mortgage Insurance

While there are ways to eliminate PMI, it’s best to know strategies to avoid private mortgage insurance altogether. Here are your options:

Option	Pros	Cons
20% Down Payment	Avoid PMI entirely Lower monthly payments	Requires significant savings May take longer to buy a home
Piggyback Loan (80/10/10)	Avoid PMI Smaller down payment needed	Higher interest rates and closing costs Managing two loans
FHA Loan	Lower down payment requirements Accessible to more borrowers	Requires mortgage insurance premiums (MIP), which are different from PMI but still add to costs
VA Loan	No down payment or PMI required Favorable terms for veterans	Limited to military members, veterans and their families Funding fee required
Buy a Smaller or Older Home	Lower overall loan amount Easier to save for a larger down payment	May not meet all your needs Might need to compromise on location or amenities

Ask the experts:

Is PMI a better value than the FHA's MIP coverage?

Retired Senior Vice President, MGIC

Yes. With FHA, they add insurance to the loan amount and the borrower doesn't build equity as fast as with PMI, Zimmerman says, explaining that PMI is a separate item, meaning more of the borrower's payment goes toward the principal on the loan and builds equity faster. Typically, after two years, Freddie and Fannie will call for a new appraisal and reevaluate the insurance. If the home's value increases to the point the borrower has 20 percent equity, they will reevaluate it as well, he says.

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FAQ About Private Mortgage Insurance

The topic of private mortgage insurance (PMI) often raises questions for homeowners. To provide clarity, we've addressed some of the most commonly asked questions about it. Here’s what you need to know about PMI.

What does private mortgage insurance do?

Private mortgage insurance (PMI) protects the lender if you default on your loan. It enables you to get a mortgage with a lower down payment.

Is PMI based on credit score?

Your credit score influences PMI costs. Higher credit scores result in lower PMI premiums.

What is the major advantage of private mortgage insurance?

PMI allows you to purchase a home even if your down payment is less than 20%, making homeownership more accessible.

What's the difference between PMI and mortgage insurance premiums (MIP)?

PMI applies to conventional loans and can be canceled once you reach 20% equity. MIP is required for FHA loans and usually lasts for the life of the loan if the down payment is less than 10%.

How long is PMI required?

PMI is required until you reach 20% equity in your home. It is automatically canceled when your loan balance drops to 78% of the home's original value.

What's the difference between mortgage insurance and homeowners insurance?

Mortgage insurance protects the lender if you default on the loan. Homeowners insurance protects you from losses due to damage, theft or liability on the property.

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About Zachary Romeo, CBCA

Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.

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sources

National Association of Realtors. "2022 Obstacles to Home Buying." Accessed December 12, 2024.
Urban Institute. "Housing Finance at a Glance: A Monthly Chartbook (March 2024)." Accessed December 12, 2024.