Private Mortgage Insurance (PMI) Explained

Private Mortgage Insurance (PMI) is an additional cost that many homebuyers pay when purchasing a home with a conventional mortgage and a down payment of less than 20%. While it increases your monthly housing costs, PMI allows qualified buyers to purchase a home sooner without waiting to save a larger down payment.

What Is Private Mortgage Insurance (PMI)?

PMI is insurance that protects the lender, not the homeowner, if the borrower stops making mortgage payments and defaults on the loan.

Although the borrower pays for PMI, the coverage is designed to reduce the lender's financial risk when making loans with smaller down payments.

When Is PMI Required?

PMI is typically required for conventional loans when the buyer puts down less than 20% of the home's purchase price.

For example:

• 5% down payment → PMI is usually required.

• 10% down payment → PMI is usually required.

• 15% down payment → PMI is usually required.

• 20% or more down payment → PMI is generally not required.

Some lender programs may have different requirements, so it's important to review your loan terms.

How Much Does PMI Cost?

The cost of PMI varies depending on factors such as:

• Loan amount

• Down payment size

• Credit score

• Loan term

• Type of mortgage

In general, PMI is commonly estimated to cost about 0.2% to 2% of the original loan amount per year, depending on the borrower's risk profile.

How Is PMI Paid?

There are several ways PMI may be paid:

• Monthly premium added to your mortgage payment

• Upfront premium paid at closing

• Combination of upfront and monthly premiums

• Lender-paid PMI, where the lender covers the insurance cost in exchange for a higher interest rate

Can PMI Be Removed?

Yes. For many conventional loans, PMI does not last for the entire life of the loan.

You may be able to remove PMI by:

• Reaching 20% equity and requesting cancellation (subject to your lender's requirements)

• Having PMI automatically terminate once you reach the applicable loan-to-value threshold under federal law, provided you're current on payments

• Refinancing into a new loan without PMI if you've built enough equity and qualify

Benefits of PMI

Although it adds to your monthly payment, PMI can offer advantages:

• Buy a home sooner without waiting to save a 20% down payment

• Preserve savings for emergencies or home expenses

• Enter the housing market earlier

• Potentially benefit from home appreciation while building equity

PMI vs. FHA Mortgage Insurance

Feature	PMI (Conventional Loan)	FHA Mortgage Insurance
Applies To	Conventional loans	FHA loans
Typical Down Payment	Less than 20%	As low as program requirements allow
Cancellation	Often removable after sufficient equity is reached and other requirements are met	May remain for the life of the loan in some cases, depending on loan terms and down payment

Tips to Reduce or Avoid PMI

• Save for a 20% down payment if possible.

• Improve your credit score before applying.

• Consider whether a larger down payment fits your financial goals.

• Compare loan options from multiple lenders.

• Ask about lender-paid PMI and its long-term costs.

Common Misconceptions

• "PMI protects the homeowner."

  
  

  No. PMI protects the lender if the borrower defaults.

• "Everyone must pay PMI."

  
  

  No. Many borrowers avoid PMI by making a qualifying down payment or using loan programs that don't require it.

• "PMI lasts forever."

  
  

  Not necessarily. Many conventional borrowers can remove PMI once they meet the lender's and legal requirements.

Homebuyer's PMI Checklist

• ✔ Ask whether your loan requires PMI.

• ✔ Compare monthly PMI costs from different lenders.

• ✔ Understand when PMI can be removed.

• ✔ Factor PMI into your monthly housing budget.

• ✔ Review all loan options before choosing a mortgage.

Pro Tip

Don't let PMI discourage you from buying a home if you're otherwise financially prepared. In many cases, paying PMI for a few years can be more beneficial than delaying your home purchase while saving for a 20% down payment. Compare the total costs, your long-term goals, and available loan options to determine which approach is best for your situation.