Private Mortgage Insurance (PMI): Complete Guide

Buying a home is one of the biggest financial decisions most people will make in their lifetime. If you’re planning to put down less than 20% on a home, Private Mortgage Insurance (PMI) is something you need to understand. This guide will walk you through what PMI is, why it exists, how much it costs, and most importantly, how you can potentially avoid it.

What Is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is a type of insurance that protects the lender—not you—in case you default on your home loan. Lenders typically require PMI if your down payment is less than 20% of the home’s purchase price. It minimizes their risk in high loan-to-value (LTV) scenarios.

Why Lenders Require PMI

The primary reason lenders require PMI is to protect themselves. If a borrower defaults and the home goes into foreclosure, PMI helps the lender recover part of the loan amount. This risk mitigation makes lenders more comfortable approving loans for buyers with smaller down payments.

How Much Does PMI Cost?

PMI can cost anywhere between 0.3% to 1.5% of your original loan amount annually, depending on:

• Your credit score
  
• Loan-to-value ratio (LTV)
  
• Loan term
  
• Loan type
  

Example Cost Breakdown

If you have a $300,000 loan and your PMI rate is 1%, your annual PMI cost would be $3,000, or $250 per month.

Wondering how PMI will affect your mortgage payments? Use our Mortgage Calculator to run the numbers.

Types of PMI

There are several PMI options, each with different pros and cons:

1. Borrower-Paid PMI (BPMI)

• Paid as a monthly premium added to your mortgage payment.
  
• Can be canceled once you reach 20% equity in your home.
  

2. Lender-Paid PMI (LPMI)

• The lender pays the PMI but typically charges a higher interest rate.
  
• Cannot be canceled—only eliminated through refinancing.
  

3. Single-Premium PMI

• One-time upfront cost at closing.
  
• May be financed into the mortgage or paid in cash.
  

4. Split-Premium PMI

• Combination of upfront and monthly payments.
  
• Offers flexibility if you want to reduce your monthly costs.
  

Not sure which PMI option is best for you? Connect with a mortgage advisor to explore your options.

How to Avoid or Remove PMI

1. Put Down 20%

The most straightforward way to avoid PMI is to make a 20% down payment.

2. Use a Piggyback Loan

Also known as an 80-10-10 loan, this involves:

• 80% first mortgage
  
• 10% second mortgage
  
• 10% down payment
  

This structure avoids PMI but often comes with higher overall costs and more complexity.

3. FHA or VA Loans

• FHA loans come with mortgage insurance premiums (MIP), which are different from PMI but serve a similar purpose.
  
• VA loans, available to eligible veterans, do not require PMI.
  

Learn more about FHA loans and VA loans to see if you qualify.

4. Request PMI Cancellation

You can ask your lender to cancel PMI when:

• Your LTV reaches 80%
  
• You’ve made timely payments
  
• Your home hasn’t declined in value
  

By law, lenders must automatically terminate PMI when your LTV reaches 78%, provided you’re current on your payments.

Pros and Cons of PMI

Pros

• Makes homeownership possible with a smaller down payment
  
• Allows you to build equity sooner
  
• May help you lock in low mortgage rates while saving for a bigger down payment
  

Cons

• Adds to monthly housing costs
  
• Doesn’t benefit you directly
  
• May be hard to cancel in some loan scenarios
  

FAQ: Private Mortgage Insurance

Read Next

Looking to expand your mortgage knowledge? Check out these helpful guides:

• FHA ARM Loan Your Comprehensive Guide
• FHA First-Time Homebuyer Loan: Your Path to Homeownership

Final Thoughts

PMI may seem like an unnecessary burden, but it can be the key to unlocking homeownership for many buyers. Understanding how it works—and how to manage or avoid it—puts you in a stronger financial position. By planning strategically, you can minimize PMI’s impact or eliminate it altogether.