PMI protects the lender, not you, when you put down less than 20 percent

Private Mortgage Insurance (PMI) is a monthly fee added to your mortgage payment when you borrow more than 80 percent of the home's purchase price. The insurance reimburses the lender if you stop paying and they have to foreclose. PMI is not optional—if you put down less than 20 percent, your lender will require it as a condition of the loan.

The cost varies based on your down payment size, credit score, loan amount, and the lender's risk assessment. A smaller down payment or lower credit score means higher PMI. You pay the premium monthly as part of your mortgage bill, though some lenders allow you to pay it upfront instead.

PMI is different from homeowners insurance, which protects your property against damage. PMI only protects the lender's investment in the loan.

Key Takeaways

  • PMI is required when your down payment is less than 20 percent and costs roughly 0.5 to 1.5 percent of the loan amount annually, though this varies by lender and borrower profile.
  • You pay PMI monthly as part of your mortgage payment until you reach 20 percent equity in the home through a combination of payments and appreciation.
  • PMI can be removed once you request it and meet your lender's equity threshold, typically 20 to 22 percent depending on loan type and when you took out the mortgage.
  • Federal law requires lenders to automatically cancel PMI at 22 percent equity on most loans, but you can request removal earlier if your home has gained value.

How PMI cost is calculated and what you actually pay

PMI premiums are quoted as an annual percentage of your loan amount. A loan of $300,000 with a PMI rate of 0.8 percent per year costs $2,400 annually, or $200 per month. Rates typically range from 0.5 to 1.5 percent depending on risk factors, but some borrowers with excellent credit and a 15 percent down payment may pay closer to 0.3 percent, while those with lower credit scores or smaller down payments may pay 2 percent or higher.

The exact rate your lender quotes depends on three main factors: how much you are borrowing relative to the home's value (called the loan-to-value ratio), your credit score, and the type of mortgage. A 10 percent down payment triggers higher PMI than a 15 percent down payment on the same home. A 620 credit score will cost more than a 740 credit score.

Some lenders offer lender-paid PMI, where the lender covers the insurance cost but charges you a higher interest rate instead. This can make sense if you plan to sell or refinance within a few years, but over a 30-year loan it usually costs more overall.

When PMI ends and how to remove it

PMI is not permanent. Once you build equity in the home, you can have it removed. The threshold is typically 20 percent equity—meaning you owe 80 percent or less of the home's current value. This happens through a combination of mortgage payments (which build equity automatically) and home appreciation (which increases the home's value).

You have two paths to removal. Automatic cancellation happens when you reach 22 percent equity on most conventional loans. Federal law requires lenders to cancel PMI automatically at this point without you asking. On FHA loans, the rules are stricter: PMI continues for the life of the loan if you put down less than 10 percent, or for 11 years if you put down 10 percent or more.

You can also request removal early once you reach 20 percent equity. Contact your lender and ask for a PMI cancellation request. Some lenders require a home appraisal to confirm the current value; others use automated valuation models. If your home has appreciated significantly, you may reach 20 percent equity faster than your payment schedule alone would get you there. Lenders typically charge $300 to $700 for an appraisal if one is required.

PMI on different loan types

Conventional loans use PMI as described above. You can remove it once you reach 20 percent equity, and it automatically cancels at 22 percent equity.

FHA loans use mortgage insurance premiums (MIP) instead, which work differently. You pay an upfront MIP of 1.75 percent of the loan amount at closing (often rolled into the loan balance), plus an annual MIP that runs 0.55 to 0.8 percent depending on loan length and down payment. Unlike PMI, FHA MIP does not automatically cancel. If you put down less than 10 percent, you pay MIP for the entire 30-year loan. If you put down 10 percent or more, MIP cancels after 11 years of payments.

VA loans do not use PMI or MIP. Instead, they use a funding fee (typically 2.3 percent for first-time users, lower for subsequent loans) that is usually paid upfront or rolled into the loan. This fee is a one-time cost, not a monthly payment.

USDA loans use a may provide fee structure similar to VA loans—an upfront fee of 2 percent of the loan amount plus an annual fee of 0.35 percent. Like VA loans, USDA loans do not require PMI.

Strategies to avoid or minimize PMI

The most direct way to avoid PMI is to save for a 20 percent down payment before buying. On a $300,000 home, that means $60,000 down. If that timeline is too long, you have other options.

Piggyback loans (also called 80-10-10 or 80-15-5 loans) let you take out two mortgages instead of one: a first mortgage for 80 percent of the purchase price and a second mortgage for part of the remaining amount, with you putting down the rest in cash. This avoids PMI on the first mortgage, though you pay interest on both loans and the second mortgage typically carries a higher rate. This strategy works best if you have enough cash for the down payment but want to preserve liquidity.

Putting down slightly more than 20 percent avoids PMI entirely and is often simpler than a piggyback loan. If you can save $65,000 instead of $60,000, the extra $5,000 eliminates PMI for the life of the loan.

If you are buying with an FHA loan, putting down 10 percent instead of 3 percent means MIP cancels after 11 years instead of lasting forever. The higher down payment costs more upfront but saves thousands over time.

How PMI affects your total loan cost

PMI is a real expense that adds up over time. On a $300,000 loan with 10 percent down ($30,000) and a 0.9 percent PMI rate, you pay $2,430 per year, or $202.50 per month. If you reach 20 percent equity in 8 years, you will have paid roughly $19,440 in PMI. If you reach it in 12 years, you will have paid roughly $29,160.

The total cost depends on how quickly you build equity. Faster equity growth (through larger payments, home appreciation, or both) means PMI ends sooner. A home that appreciates 3 percent per year will reach 20 percent equity faster than one that stays flat, potentially saving you thousands in PMI payments.

When comparing down payment options, factor PMI into the total cost of borrowing. A 10 percent down payment with PMI may cost less upfront but more over the life of the loan than a 15 percent down payment without PMI, depending on how long you keep the loan.

Frequently Asked Questions

Can I remove PMI before reaching 20 percent equity?

No. Lenders will not cancel PMI until you reach 20 percent equity. You can request removal at that point, and federal law requires automatic cancellation at 22 percent equity on conventional loans. Some lenders may require an appraisal to confirm current home value.

Is PMI tax deductible?

PMI was tax deductible for some borrowers in past years, but that deduction expired at the end of 2023 and has not been extended. Check with a tax professional for your specific situation, as rules can vary.

What happens to PMI if I refinance?

If you refinance before reaching 20 percent equity, the new loan will require PMI again based on the new loan-to-value ratio. If you refinance after reaching 20 percent equity, you can avoid PMI on the new loan. Refinancing to remove PMI only makes sense if the interest rate savings or equity gain justify the closing costs.

Does PMI apply to adjustable-rate mortgages?

Yes. PMI applies to any mortgage with less than 20 percent down, regardless of whether the rate is fixed or adjustable. The PMI itself does not change with rate adjustments, but the total monthly payment will if your interest rate changes.

Can I pay PMI upfront instead of monthly?

Some lenders allow you to pay PMI as a lump sum at closing instead of spreading it across monthly payments. This can save money if you have the cash available, since you avoid interest on the PMI amount. Ask your lender whether this option is available and what the total cost would be.