What Is PMI? All About Private Mortgage Insurance
Private mortgage insurance (PMI) protects your mortgage lender if you stop making payments on your home loan. Lenders typically require it on conventional mortgages when you put down less than 20% of the home’s purchase price.
While PMI can increase monthly mortgage costs, it can make homeownership possible for buyers who haven’t saved up 20%.
Even better, borrowers who make mortgage payments on time can eventually cancel PMI. Understanding how private mortgage insurance works, what it costs and when you can remove it can help you save money over the life of your loan.
- PMI protects your lender if you default on your mortgage and is typically required for conventional loans with down payments below 20%.
- PMI makes it possible to buy a home with less money down, but it adds to your total borrowing costs.
- You can remove PMI in several ways, including requesting removal after reaching 20% equity in your property and refinancing after your home’s value increases.
How much does PMI cost?
PMI typically costs between 0.2% and 2% of your mortgage loan amount annually, depending on factors such as your credit score, down payment and loan terms.
For example, if you purchased a $502,700 home with a 5% down payment, your mortgage would be approximately $477,565. Based on the estimated PMI range of 0.2% to 2%, you could pay around $955 to $9,551 in mortgage insurance annually, or $80 to $796 per month.
Keep in mind that these figures represent a range of potential costs, not the average PMI premium. Your actual cost will depend on your loan details and the lender’s requirements. You can find your estimated PMI cost in the loan estimate your lender provides, which breaks down your expected mortgage payments and other loan costs.
5 factors that affect the cost of PMI
- Your credit score and credit history. A higher credit score can help you pay less for PMI.
- Your loan-to-value ratio. Your loan-to-value (LTV) ratio measures how much of your home’s value you’re borrowing. The more money you put down, the lower your LTV ratio will be. A lower LTV means you’re borrowing less relative to the home’s value, which reduces the lender’s risk and can help you qualify for lower PMI premiums.
- The loan term. Although 30-year mortgages are the most common choice, it pays to choose a shorter loan term if you can afford the higher monthly payments. A shorter repayment timeline can help you reach 20% equity sooner, at which point you can request PMI removal.
- The type of home you’re financing. Single-family homes usually cost the least to insure. Multifamily homes and manufactured homes typically have higher premiums.
- Whether your rate is fixed or adjustable. Adjustable-rate mortgages (ARMs) may require higher PMI payments because of the risk of higher rates.
How do you pay for PMI?
You can choose to pay your PMI monthly, pay all of it upfront or combine those options with “split” payments. You also have the option to let your lender pay the PMI premium — but you’ll have to accept a higher interest rate in exchange. For more detail on each option, click that option’s name below.
Monthly PMI
Monthly PMI is the most common PMI choice because it lets you spread the cost out by adding it to your monthly housing payment. The premium is based on a percentage of your loan amount.
Upfront PMI
This may also be called “single-premium PMI” and allows you to prepay the full cost of your PMI in a lump sum as part of your closing costs.
Split PMI
You can mix and match the monthly and upfront premium options, paying a portion of the PMI upfront and adding the remaining balance to your monthly payment. You may also see this option called “combination PMI.”
Lender-paid mortgage insurance (LPMI)
If you agree to a higher mortgage interest rate, your lender may offer lender-paid mortgage insurance (LPMI). The lender pays the PMI premium on your behalf with this option. However, you’re stuck with the higher rate for as long as you have the loan (unless you refinance).
How to choose the best PMI option for your financial situation
| PMI payment method | Payment timing | Upfront cash requirement | Monthly payment effect | Major tradeoff |
|---|---|---|---|---|
| Monthly PMI | Paid each month with your mortgage | Little or no additional cash upfront | Increases your monthly mortgage payment | Higher monthly costs, but you can typically cancel PMI once you qualify |
| Upfront PMI | Paid in a lump sum at closing | Higher upfront cost unless covered by a seller credit or other permitted funding | No ongoing monthly PMI payment | You may not recover the full upfront cost if you sell or refinance early |
| Split PMI | Part paid at closing and the rest monthly | Moderate upfront costs | Lower monthly PMI payment than monthly-only PMI | Requires more cash upfront but reduces ongoing costs |
| Lender-paid PMI | Paid by the lender, typically in exchange for a higher interest rate | Usually no separate upfront PMI payment | No separate PMI charge, but the higher interest rate increases your mortgage payment | Can’t cancel the higher interest rate when you reach 20% equity; refinancing may be necessary |
How to get rid of PMI
There are a handful of ways to get PMI removed from your home loan. The right option for you depends on your financial situation, how much equity you have and how much effort you want to put into the process.
Request PMI cancellation at 80% LTV
You can typically request PMI cancellation once your mortgage balance is scheduled to reach 80% of your home’s original value, which is typically the lower of the purchase price or appraised value when you bought the home. You may also qualify sooner if you make extra principal payments that bring your loan balance down to that level.
For example, if your home’s original value was $300,000, you could request PMI cancellation once your mortgage balance reaches $240,000.
To qualify, you’ll need to submit a written request to your loan servicer, have a good payment history and be current on your mortgage. Your lender may also require proof that your home’s value hasn’t declined since the purchase date.
Automatic PMI termination at 78% LTV
Even if you don’t request PMI cancellation yourself, your loan servicer must automatically terminate PMI when your mortgage balance is scheduled to reach 78% of your home’s original value.
For example, if your home’s original value was $300,000, PMI would terminate automatically when your scheduled loan balance reaches $234,000.
You must be current on your mortgage payments to qualify. If you’re behind, PMI termination will be delayed until you bring your payments up to date.
PMI termination at the midpoint of your loan
There’s another PMI removal rule that can help homeowners who haven’t reached the usual cancellation thresholds. PMI must terminate when your loan reaches the midpoint of its amortization schedule if it hasn’t already been removed.
You must be current on your mortgage payments for PMI to end under this rule. Removing PMI based on increased home value.
You may also be able to get rid of PMI if your home’s value has increased significantly since you purchased it. Unlike the federal 80% LTV cancellation rule, which is based on your home’s original value, this option considers what your home is worth today.
For example, let’s say you purchased your home for $300,000 and still owe $250,000 on your mortgage. If your home’s value has increased to $350,000, your current LTV would be about 71%, which could make you eligible to remove PMI.
However, this option isn’t guaranteed. Your eligibility depends on your loan type, how long you’ve owned the home and your mortgage investor’s requirements. You may also need to pay for a new appraisal to prove your home’s current value.
Refinance to remove PMI
Refinancing your mortgage is another way to potentially eliminate PMI, especially if your home has increased in value. If your new mortgage balance is 80% or less of your home’s current appraised value, you may qualify for a conventional refinance without PMI.
For example, if your home is now worth $400,000 and you owe $300,000, your LTV would be 75%. That could allow you to refinance into a new loan without private mortgage insurance.
However, refinancing just to eliminate PMI isn’t always the best financial move. You’ll need to compare the potential PMI savings against your new mortgage rate, closing costs and other loan terms. If you already have a low interest rate, refinancing into a higher rate could cost you more than you save by eliminating PMI.
How to avoid PMI
If you don’t have the money to come up with a 20% down payment and don’t want to pay PMI, there are a few more options worth considering:
- Get a piggyback loan. A piggyback loan lets you use two mortgages to finance your home purchase. For example, with an 80-10-10 loan, you make a 10% down payment, take out a second mortgage for 10% (usually a home equity loan or home equity line of credit) and finance the remaining 80% with your primary mortgage. This can help you avoid PMI, but you’ll have two loans to repay, potentially with higher interest rates and fees.
- Get a VA loan. Eligible military borrowers can avoid PMI with a VA loan, even with no down payment. However, most borrowers must pay a VA funding fee unless they qualify for an exemption.
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Get an FHA loan. An FHA loan doesn’t require conventional PMI, but it does require FHA mortgage insurance. You’ll typically pay both an upfront premium and annual premiums collected monthly. However, there are other details to understand about FHA mortgage insurance:
- You’ll pay it for the life of your loan if you make the minimum 3.5% down payment
- You have to pay both an upfront and monthly FHA mortgage insurance premium (you can’t choose one or the other like you can with conventional PMI)
- It’s required on all new FHA purchase and refinance loans, regardless of your down payment or how much equity you have in your home
PMI vs. homeowners insurance
The most important difference between PMI and homeowners insurance is that homeowners insurance covers you, the homeowner, if something unexpected happens — PMI does not. Nonetheless, as a homeowner, you’re responsible for paying the premiums for both PMI and homeowners insurance.
Another important difference is that, with PMI, you can’t choose your insurance company — the lender chooses it. That’s why it’s important to review mortgage insurance costs and keep a close eye on your loan estimates when shopping for a purchase or refinance loan. Paying attention to your loan estimate is the only way to see how PMI costs compare.
PMI vs. MIP
MIP is the annual mortgage insurance premium (MIP) paid by FHA loan borrowers. Just like PMI, it covers only the lender’s losses if a borrower defaults on their home loan. Unlike PMI, FHA borrowers with down payments of less than 10% must pay mortgage insurance for the life of the loan.
That said, PMI on conventional loans can be canceled before the loan is paid off based on various criteria, which is discussed below. MIP on FHA loans works differently, especially since borrowers with down payments of less than 10% must pay mortgage insurance for the life of the loan.
Frequently asked questions
On a $300,000 home with a 5% down payment, PMI could cost around $48 to $475 per month, based on an annual rate of 0.2% to 2% of the $285,000 loan amount.
Putting 20% down helps you avoid PMI and lowers your monthly payment, but paying PMI may make sense if you want to buy before saving the full 20% or keep more cash in savings.
On a $400,000 mortgage loan, private mortgage insurance could cost approximately $67 to $667 per month, assuming an annual PMI rate of 0.2% to 2%.
You can typically request PMI cancellation when your mortgage balance reaches 80% of your home’s original value. Otherwise, PMI typically ends automatically when your scheduled loan balance reaches 78%, provided you’re current on payments.
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