When buying a home, one of the most confusing costs new homeowners encounter is Private Mortgage Insurance, commonly known as PMI. While PMI can help you qualify for a mortgage with a smaller down payment, it also increases your monthly expenses — often without directly benefiting you.
This guide breaks down what Private Mortgage Insurance is, how it works, when it’s required, and most importantly, how you can avoid PMI and save thousands over the life of your mortgage.
Table of Contents
- 1 What Is Private Mortgage Insurance (PMI)?
- 2 When Is Private Mortgage Insurance Required?
- 3 How Much Does Private Mortgage Insurance Cost?
- 4 Types of Private Mortgage Insurance
- 5 How to Avoid Paying Private Mortgage Insurance
- 6 How to Remove Private Mortgage Insurance
- 7 Pros and Cons of Private Mortgage Insurance
- 8 Is PMI Always Bad?
- 9 Conclusion: Smart Homeownership Without PMI
- 10 FAQs About Private Mortgage Insurance (PMI)
- 10.1 What is Private Mortgage Insurance (PMI)?
- 10.2 Who benefits from PMI?
- 10.3 When can I stop paying PMI?
- 10.4 How much does PMI usually cost?
- 10.5 Does every mortgage require PMI?
- 10.6 Can I avoid PMI without a 20% down payment?
- 10.7 Is PMI tax deductible?
- 10.8 What’s the difference between PMI and homeowners insurance?
- 10.9 How long do I have to pay PMI?
- 10.10 What happens if I refinance?
- 10.11 Can I negotiate PMI rates?
- 10.12 Does PMI affect loan approval?
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is a type of insurance that protects your lender, not you, if you stop making payments on your mortgage.
In simpler terms:
PMI reduces the lender’s risk when they lend money to homebuyers who put down less than 20% of the home’s purchase price.
Even though you pay for it, PMI doesn’t offer you any direct benefit — it simply enables you to buy a home sooner with a smaller down payment.
When Is Private Mortgage Insurance Required?
Most lenders require PMI if:
- You make a down payment of less than 20% on a conventional loan.
- Your loan-to-value (LTV) ratio exceeds 80%.
Example:
If you’re buying a home for $400,000, you’d need to put down at least $80,000 (20%) to avoid PMI.
If you only put down $40,000 (10%), your LTV becomes 90%, and PMI will apply.
How Much Does Private Mortgage Insurance Cost?
PMI typically costs between 0.3% and 1.5% of your original loan amount per year, depending on factors like:
- Your credit score
- Loan type and term
- Down payment amount
- Property value
Example:
For a $300,000 loan with a 0.8% PMI rate:
- Annual PMI = $2,400
- Monthly PMI = $200
That’s an extra $200 every month — money that could otherwise go toward your principal or savings.
Typical PMI Cost Example
| Down Payment % | Loan-to-Value (LTV) | Estimated PMI Rate | Annual PMI Cost (on $300,000 Loan) | Monthly PMI Cost |
|---|---|---|---|---|
| 5% | 95% | 1.20% | $3,600 | $300 |
| 10% | 90% | 0.80% | $2,400 | $200 |
| 15% | 85% | 0.50% | $1,500 | $125 |
| 20% | 80% | 0% (No PMI) | $0 | $0 |
Insight: Even an extra 5% down payment can save you $75–$175 per month in PMI premiums.
Types of Private Mortgage Insurance
There are several forms of PMI, and understanding each helps you decide which fits your needs best.
1. Borrower-Paid Mortgage Insurance (BPMI)
- The most common type.
- Paid monthly as part of your mortgage payment.
- Can be canceled once your LTV drops below 80%.
2. Lender-Paid Mortgage Insurance (LPMI)
- The lender pays the insurance upfront, but you pay for it indirectly via higher interest rates.
- It can’t be canceled unless you refinance.
3. Single-Premium PMI
- A one-time upfront payment at closing.
- May be cheaper over time but requires more cash upfront.
4. Split-Premium PMI
- Combines a smaller upfront payment with lower monthly payments.
- Offers flexibility for borrowers who can pay a bit more at closing.
How to Avoid Paying Private Mortgage Insurance
Luckily, there are several strategies to avoid PMI or get rid of it faster.
1. Make a 20% Down Payment
This is the simplest and most direct way to avoid PMI altogether.
2. Use a Piggyback Loan (80/10/10 Strategy)
Take out two loans: one for 80% of the home price and another for 10%, then make a 10% down payment.
This structure avoids PMI but comes with a second loan that has its own interest rate.
3. Consider a VA Loan (for Veterans and Active Duty Members)
VA loans require no PMI — one of their biggest benefits.
4. Choose Lender-Paid PMI (LPMI) Carefully
If you plan to stay in your home for a shorter term, LPMI might save you money despite a higher interest rate.
5. Refinance Once You Have 20% Equity
Once your home’s value rises or you’ve paid down your loan enough, you can refinance to remove PMI.
6. Get Your Home Reappraised
If property values in your area have gone up, a reappraisal may prove you’ve reached 20% equity — allowing PMI cancellation.
How to Remove Private Mortgage Insurance
By law (under the Homeowners Protection Act of 1998), lenders must automatically cancel PMI when your LTV reaches 78% — as long as you’re current on payments.
You can also request PMI cancellation once:
- Your LTV hits 80%.
- You’ve made consistent, on-time payments.
- Your home hasn’t declined in value.
Pros and Cons of Private Mortgage Insurance
| Pros | Cons |
|---|---|
| Enables home purchase with less than 20% down | Increases monthly payment |
| Helps first-time buyers enter the market sooner | Offers no direct benefit to the borrower |
| Can be removed once equity grows | Costs can add up to thousands per year |
Is PMI Always Bad?
Not necessarily.
If waiting to save 20% would take years — during which home prices and interest rates rise — paying PMI might actually help you build equity faster by getting into the market sooner.
Think of it as a temporary cost for early homeownership.
Conclusion: Smart Homeownership Without PMI
Private Mortgage Insurance may feel like an unnecessary expense, but it often opens the door to homeownership for those without a large down payment. The key is to understand your options and know when — and how — to eliminate it.
Whether you choose to pay PMI temporarily or structure your financing to avoid it, your goal should be to maximize equity and minimize unnecessary costs.
FAQs About Private Mortgage Insurance (PMI)
What is Private Mortgage Insurance (PMI)?
It’s insurance that protects the lender if you default on your mortgage — usually required when your down payment is under 20%.
Who benefits from PMI?
Your lender benefits, since PMI reduces their financial risk.
When can I stop paying PMI?
When your loan-to-value ratio drops to 80%, you can request cancellation. It’s automatically removed at 78%.
How much does PMI usually cost?
Between 0.3% and 1.5% of your original loan amount per year, depending on your credit and loan terms.
Does every mortgage require PMI?
No. Only conventional loans with less than 20% down require PMI.
Can I avoid PMI without a 20% down payment?
Yes — through piggyback loans, VA loans, or LPMI options.
Is PMI tax deductible?
Sometimes. Depending on current tax laws and income level, you may be able to deduct PMI premiums.
What’s the difference between PMI and homeowners insurance?
PMI protects the lender, while homeowners insurance protects your property.
How long do I have to pay PMI?
Usually until you reach 20% equity — often 5–10 years depending on payments and appreciation.
What happens if I refinance?
If your new loan amount is 80% or less of your home’s value, the refinance removes PMI.
Can I negotiate PMI rates?
Not directly, but improving your credit score or increasing your down payment can reduce your rate.
Does PMI affect loan approval?
No, but the additional monthly cost may impact how much you qualify to borrow.
Ahmad Faishal is now a full-time writer and former Analyst of BPD DIY Bank. He’s Risk Management Certified. Specializing in writing about financial literacy, Faishal acknowledges the need for a world filled with education and understanding of various financial areas including topics related to managing personal finance, money and investing and considers investoguru as the best place for his knowledge and experience to come together.