PMI is insurance that protects your lender, not you, when you put down less than 20 percent

PMI (private mortgage insurance) is a monthly charge added to your mortgage payment when you borrow more than 80 percent of your home's purchase price. The insurance protects the lender if you stop paying—it covers part of their loss if foreclosure happens. You pay the premium, but the lender collects the benefit. PMI is not homeowners insurance, property tax, or homeowners association fees; it is a separate line item on your monthly statement.

The amount you pay depends on three things: how much you borrowed relative to the home's value (called the loan-to-value ratio or LTV), your credit score, and the type of mortgage. A borrower with a 10 percent down payment and a 680 credit score pays more than someone with a 15 percent down payment and a 750 score on the same loan amount. PMI typically ranges from 0.3 to 1.5 percent of the loan amount per year, split into monthly payments, though the exact rate varies by lender and loan program.

Key Takeaways

  • PMI protects your lender's investment, not your home; you pay it but the lender receives the benefit if you default.
  • You owe PMI when your down payment is less than 20 percent of the purchase price, and the amount depends on your LTV ratio and credit score.
  • PMI typically costs between 0.3 and 1.5 percent of your loan amount annually, paid monthly as part of your mortgage bill.
  • You can remove PMI once you reach 20 percent equity in your home, either by paying down the principal or waiting for the home to appreciate.
  • Some loan programs (VA, USDA, FHA) have different insurance structures; FHA mortgage insurance is mandatory for the life of the loan if you put down less than 10 percent.

How PMI is calculated and what it costs each month

PMI is expressed as an annual percentage of your loan amount, then divided into 12 monthly payments. If you borrow $300,000 and your PMI rate is 0.75 percent per year, you pay $2,250 annually, or $187.50 per month. That $187.50 appears on your mortgage statement alongside principal, interest, property taxes, and homeowners insurance.

The rate you receive depends on your risk profile. Lenders use your credit score, down payment size, and loan type to assign a tier. A 5 percent down payment with a 700 credit score might cost 1.2 percent annually, while a 15 percent down payment with a 760 score might cost 0.5 percent. Shop multiple lenders before closing—PMI rates are not standardized, and a difference of 0.25 percent adds up to hundreds of dollars per year over the life of the loan.

PMI is not tax-deductible for most borrowers, though there are narrow exceptions if you itemize deductions and meet income limits. Check with a tax professional about your specific situation, as rules change year to year.

When PMI ends and how to remove it

PMI is not permanent. Once you reach 20 percent equity in your home—meaning you owe 80 percent or less of what the home is worth—you can request removal. Equity builds two ways: by paying down your mortgage principal, or by the home's value increasing. If you bought at $300,000 with 10 percent down ($30,000), you need to either pay the loan down to $240,000 or have the home appreciate to $375,000 (so your $270,000 loan is 72 percent of value).

To remove PMI, contact your lender and request cancellation. Most lenders require a written request and proof of the home's current value—usually an appraisal, though some accept a broker price opinion or automated valuation model. The lender may also require that you be current on all payments and have no second mortgage or home equity line of credit. Timing varies; some lenders process removal within weeks, others take two to three months.

If you do not request removal, your lender is required by federal law to cancel PMI automatically once you reach 22 percent equity (if you are current on payments) or when you reach the midpoint of your loan term, whichever comes first. On a 30-year mortgage, that midpoint is 15 years. Automatic cancellation is slower than requesting it yourself, so do not wait.

PMI versus mortgage insurance on FHA and government loans

FHA loans, VA loans, and USDA loans do not use PMI. Instead, they have their own insurance structures that work differently. FHA loans charge an upfront mortgage insurance premium (UFMIP) at closing and an annual mortgage insurance premium (MIP) added to your monthly payment. If you put down less than 10 percent on an FHA loan, the MIP stays for the life of the loan—you cannot remove it by reaching 20 percent equity. If you put down 10 percent or more, MIP drops off after 11 years.

VA loans do not require mortgage insurance at all, though they do charge a funding fee at closing (which can be rolled into the loan). USDA loans charge a may provide fee upfront and an annual fee added to payments, but no PMI. If you are a veteran or rural borrower, these programs may cost less overall than a conventional loan with PMI, even though the insurance structures look different.

How to avoid PMI or reduce what you pay

The clearest way to avoid PMI is to put down 20 percent or more. If that is not possible, consider a larger down payment than your minimum. Moving from 5 percent to 10 percent down lowers your PMI rate significantly and shortens the time until you can remove it. Some borrowers save longer to reach 10 or 15 percent rather than buying with 3 or 5 percent down.

Another option is a piggyback loan (also called an 80-10-10 or 80-15-5 loan). You take out a first mortgage for 80 percent of the purchase price and a second mortgage or home equity line of credit for part of the down payment, avoiding PMI on the first loan. The second loan typically has a higher interest rate, so compare the total cost of this strategy against PMI before committing. Piggyback loans are less common now than they were before 2008, and not all lenders offer them.

If your credit score is below 700, improving it before you apply can lower your PMI rate. A 50-point increase in credit score can reduce your annual PMI cost by 0.2 to 0.4 percent. Paying down existing debt and fixing errors on your credit report take time, but the savings may justify the wait if you are not in a rush to buy.

What happens if you stop paying PMI or ignore removal deadlines

PMI is a requirement of your loan, not optional. If you stop paying it, your lender will treat it as a missed payment on your mortgage, and you risk default and foreclosure. Do not skip PMI to save money in the short term.

If you reach 20 percent equity and do not request removal, PMI continues until automatic cancellation kicks in. This is not a penalty, but it is money you do not need to spend. Check your home's value every few years using online tools (Zillow, Redfin, county assessor records) to track when you might reach 20 percent equity. Once you are close, get a formal appraisal and submit a removal request to your lender.

Frequently Asked Questions

Can I remove PMI before reaching 20 percent equity?

No. PMI removal requires 20 percent equity (80 percent LTV). The only exception is if you refinance into a new loan that does not require PMI, which typically happens when rates drop or your home appreciates significantly. Refinancing has closing costs, so run the numbers before pursuing this route.

Is PMI the same as homeowners insurance?

No. Homeowners insurance protects your property and belongings from damage or theft. PMI protects the lender if you default. Both are required on most mortgages, but they are separate policies with separate costs and separate purposes.

What if my home value drops after I buy—does PMI go up?

PMI does not automatically adjust if your home loses value. Your rate is locked in at closing. However, if your home value drops significantly, you may owe more than the home is worth (negative equity), which makes it harder to refinance or remove PMI later. This is why appraisals matter when you request removal.

Can I deduct PMI from my taxes?

PMI was tax-deductible for some borrowers in past years, but that deduction expired at the end of 2021 and has not been renewed. A few states or local programs may offer credits, but federal tax deduction is not currently available. Consult a tax professional about your specific situation.

Why does my lender require PMI if I have a good credit score?

PMI is required based on loan-to-value ratio, not credit score alone. If you borrow more than 80 percent of the home's value, PMI is mandatory regardless of credit. Your credit score affects the rate you pay, not whether you pay at all. A 750 credit score with 10 percent down still requires PMI; it just costs less than a 650 score with the same down payment.