A Beginner’s Guide to PMI: Everything About Private Mortgage Insurance

Understanding Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is an extra cost required for borrowers putting down less than 20% on a conventional loan. It allows buyers to enter the housing market sooner and can be canceled once the borrower reaches 20% equity.

If you're planning to buy a home with less than 20% down, your lender will likely require PMI. But what is it, how much does it cost, and how can you avoid it? This guide breaks down everything you need to know about PMI, its costs, and how to eliminate it.

Key Takeaways

✔ PMI protects lenders, not borrowers – It covers the lender in case of default but provides no direct benefit to the homeowner. ✔ PMI is required for conventional loans with down payments below 20% but can be avoided with certain loan options. ✔ PMI can be paid in different ways – monthly payments, a lump sum at closing, or a combination of both. ✔ PMI can be removed once you reach 20% equity, either automatically or by request.

What Is PMI?

Private mortgage insurance (PMI) is a type of insurance required on conventional loans when the borrower puts down less than 20% of the home's purchase price.

Why do lenders require PMI?

• PMI protects the lender, not the borrower, in case of loan default.

• It allows buyers to purchase a home with a lower down payment.

• PMI only applies to conventional loans – government-backed loans like FHA and VA loans have different insurance structures.

PMI vs. FHA Mortgage Insurance (MIP)

PMI is often confused with Mortgage Insurance Premium (MIP), which applies to FHA loans. Here’s the difference:

✔ PMI (Private Mortgage Insurance) – Applies to conventional loans with less than 20% down and can be removed after reaching 20% equity. ✔ MIP (Mortgage Insurance Premium) – Required for FHA loans, with an upfront premium and ongoing payments (which may last for the life of the loan if less than 10% is put down).

How Much Does PMI Cost?

The cost of PMI varies based on loan size, down payment amount, and credit score. Generally, PMI costs between 0.3% and 1.5% of the loan amount per year.

Example PMI Costs:

• 10% down on a $300,000 home ($270,000 loan)

  • PMI rate: 0.8%

  • Annual PMI: $2,160

  • Monthly PMI: $180

• 15% down on a $300,000 home ($255,000 loan)

  • PMI rate: 0.5%

  • Annual PMI: $1,275

  • Monthly PMI: $106

The higher your down payment and credit score, the lower your PMI costs.

Why Is PMI Required?

Lenders require PMI when a borrower puts down less than 20% on a conventional loan because a lower down payment increases their risk. PMI is most common among first-time homebuyers and those refinancing with low equity.

Ways to avoid PMI: ✔ Put down at least 20%. ✔ Use a VA or USDA loan, which don’t require PMI. ✔ Consider a piggyback loan (80-10-10 loan). ✔ Opt for lender-paid PMI (LPMI), though this comes with a higher interest rate.

How PMI Works: Payment Options

There are four main ways to pay for PMI:

✔ Borrower-Paid PMI (BPMI) – Standard monthly payments added to the mortgage. ✔ Lender-Paid PMI (LPMI) – Lender covers PMI but increases your interest rate. ✔ Single-Premium PMI (SPMI) – One-time payment upfront at closing. ✔ Split-Premium PMI – A mix of upfront and monthly payments, reducing ongoing costs.

Example:

A borrower taking out a $270,000 mortgage with 10% down at a 0.38% PMI rate would pay:

PMI Formula: (Loan Amount) × (PMI Rate) ÷ 12

($270,000 × 0.38%) ÷ 12 = $85.50 per month

How to Remove PMI

1. Reach 20% Equity & Request Removal

• Lenders automatically remove PMI at 22% equity.

• You can request early removal at 20% equity.

• A new home appraisal may be required.

2. Refinance to Remove PMI

If your home has appreciated in value, refinancing can help you reach 20% equity faster and remove PMI.

3. Pay Down Your Mortgage Faster

Making extra payments toward principal can accelerate equity buildup and allow you to cancel PMI sooner.

Alternatives to PMI

✔ Piggyback Loan (80-10-10 Loan) – A second mortgage covering 10% down to avoid PMI. ✔ VA & USDA Loans – No PMI required. ✔ Lender-Paid PMI (LPMI) – Higher interest rate but no monthly PMI.

PMI vs. Other Mortgage Insurance Fees

PMI applies to conventional loans, whereas other loans have different insurance structures. FHA loans require Mortgage Insurance Premium (MIP), which has both upfront and annual costs. VA loans have a one-time VA Funding Fee instead of ongoing mortgage insurance. USDA loans include a Guarantee Fee, which consists of an upfront charge and an annual fee paid over the life of the loan.

Final Thoughts: Making Smart PMI Decisions

PMI allows homebuyers to enter the market with less than 20% down, but it adds to monthly mortgage costs. Understanding PMI costs, removal strategies, and alternative options can help you make the best financial decision.

If you're unsure about how PMI affects your mortgage, consult with a trusted lender to compare options and find the best path toward homeownership.