A Beginner’s Guide to PMI: Everything About Private Mortgage Insurance
The Bottom Line
Private mortgage insurance (PMI) is an extra cost required for borrowers putting down less than 20% on a conventional loan. It allows for earlier homeownership and can be cancelled once the borrower reaches 20% equity.
If you plan to put less than 20% down when you buy a home, the lender will probably require private mortgage insurance, or PMI. But what does it do and how much does it cost?
Key Takeaways
Private mortgage insurance (PMI) is designed to protect lenders in case a borrower defaults on their loan, but it provides no advantage to the borrower
PMI is mandatory when the down payment on a conventional loan is less than 20%, though it can be avoided by putting down 20% or more, or by choosing certain loan options
PMI can be paid in various ways, such as through monthly installments, a lump sum at closing, or a combination, each with its own benefits and drawbacks.
Once the borrower gains 20% equity in the home, PMI can be canceled either automatically or by request.
What is PMI?
Private mortgage insurance (PMI) is a type of insurance coverage that safeguards the lender in case the borrower defaults on their mortgage loan – industry jargon meaning the borrower stops paying their mortgage payment and the home must be foreclosed on.
If the borrower defaults, the lender can recoup some of the loan via the PMI insurance coverage in place. PMI only safeguards the lender and does not provide any protection for the borrower, even though the borrower is required to pay the PMI premium.
PMI insurance is necessary when the borrower makes a down payment of less than 20% of the home’s purchase price on a conventional mortgage loan. Other types of mortgage loans do not require PMI, which we’ll cover later.
PMI vs FHA MIP
When we talk about PMI costs, keep in mind that PMI is different than a similar fee for FHA loans called Mortgage Insurance Premium, or MIP.
FHA MIP is similar in cost for nearly all borrowers, whereas PMI costs vary widely depending on loan characteristics like credit score and down payment.
How Much Does PMI Cost?
PMI often annually costs between 0.3% and 1.5% of your original loan amount.
“The actual cost you will pay is dependent on your individual risk factors as a borrower, how large your down payment is, and your credit score,” notes Chris Natale, founder and principal of Diversified Residential Mortgage.
Indeed, putting more down can significantly reduce the cost of PMI. You’ll pay less for PMI, for example, if you make a 15% down payment versus a 10% down payment. That’s because, with more equity in the home, the lender faces less risk, which translates to lower PMI rates and smaller monthly payments.
Let’s say you are buying a $300,000 house but you only have $30,000 to put down – which equates to a 10% down payment.
“That means your total loan amount is $270,000,” explains Robert Shepherd, owner of Peak & Home Partners. “Then, assume your PMI rate is 0.8% of your loan amount, which is around the average charged. That means you will pay $2,160 a year, or $180 a month for private mortgage insurance. On top of your mortgage payment, you’ll have to budget for that extra cost.”
But if you up your down payment to 15% on that $270,000 loan, your PMI rate may go down to 0.5%, and your monthly and yearly PMI charges would drop to $1,275 and $106, respectively.
PMI Cost Calculations
You can estimate your PMI costs by viewing a mortgage insurance calculator such as the one provided by Freddie Mac. However, your lender will give you the most accurate quote.
Mortgage insurance provider MGIC publishes a rate card, where we sourced the below cost examples.
On the card, you’ll see numerous tables. Look at the block “Amortization term > 20 years” since you’ll likely have a 30-year mortgage.
The above chart highlights an example borrower with a 740-759 credit score putting 10% down (“90% LTV”). This person would pay 0.38% of the loan amount per year.
Note: There are many add-ons and discounts for various situations, like 2+ borrowers, debt-to-income ratios over 45%, etc. Other factors in the file can affect what you pay!
Calculating PMI: Example
Here’s how you would calculate the above borrower’s monthly PMI assuming a $300,000 home with 10% down.
(Home Price minus Down Payment) X PMI Factor / 12
($300,000 - $30,000) X 0.38% / 12 = $85.50 per month
As you’ll notice in the chart below, buyers with high credit scores get a huge PMI discount. But the flip side of the coin is that those with lower scores can incur massive fees.
Monthly costs are why lower-credit borrowers often choose an FHA loan. FHA mortgage insurance does not charge more for lower credit scores.
Why PMI Is Required: Who Needs It?
Again, a borrower must pay for PMI if they choose a conventional mortgage loan – one that is not insured by the U.S. government such as FHA and VA loan types – and put down less than 20%.
That commonly includes first-time purchasers and those refinancing without much equity in the home.
PMI can be avoided altogether if you put down at least 20% on a conventional loan or if you opt for a different type of home loan, such as a VA mortgage or USDA home loan.
How PMI Works: Key Mechanics
There are four main ways to pay for PMI when it is required:
Borrower-paid PMI (BPMI): This is the standard form of mortgage insurance that most borrowers choose. It is automatically added to your monthly mortgage payment until you accrue sufficient equity in your home.
Lender-paid PMI (LPMI): In this arrangement, the lender covers the PMI expense in exchange for you paying a higher mortgage interest rate.
Single-premium PMI (SPMI): Alternatively, you can make a lump sum one-time PMI payment upfront at closing, or the PMI cost can be rolled into the principal borrowed if your lender allows it.
Split-premium PMI: This combines an upfront payment with ongoing monthly premiums. The upfront premium is a one-time fee that covers part of the total insurance cost, while the monthly premiums continue until your loan ends.
PMI will be automatically canceled when your equity position reaches 22% (that’s when your mortgage balance reaches 78% of your home’s original value). Or, it can be removed earlier if you request it once you accrue 20% equity in your home, although a new home appraisal may be needed.
Different Ways to Pay PMI
As mentioned above, you can pay for PMI monthly and have it automatically applied to your mortgage payments; you can choose to have your lender pay for your PMI by agreeing to a higher mortgage rate; you can pay a large single PMI payment at closing; you can ask for your PMI cost to be added to your loan amount; or you can opt for a split-premium PMI. Each choice has its pros and cons.
Borrower-Paid PMI (BPMI)
“With BPMI, the most common option, there are no upfront costs, you can pay over time, and the cost of PMI falls off when you reach a 20% equity position. It is a fee that will increase your monthly payment above the principal and interest charged,” says Natale.
Single-Premium PMI (SPMI) and Lender-Paid PMI (LPMI)
“With SPMI, you don’t have to worry about monthly payments, but you will pay a significant amount at closing that cannot be recouped if you sell your home. And with LPMI, you also benefit from no additional monthly payments. However, you’ll be charged a higher interest rate that won’t change once your PMI rolls off at the 20% equity position.”
Split-Premium PMI
A split-premium PMI, on the other hand, can be advantageous for borrowers with higher debt-to-income ratios, as the modest upfront cost helps keep monthly payments lower, ensuring the borrower's DTI stays within the limits needed for loan eligibility. It means you pay less at closing than you would via a lump sum one-time payment, and your monthly payments would be lower than with BPMI. On the downside, split-premium mortgage insurance can be costly due to the upfront premium, which increases closing costs and is non-refundable if you refinance or sell. Monthly payments continue even after the upfront cost, and if you finance that upfront cost the loan balance increases, leading to higher interest payments. Additionally, the cost upfront may affect your borrowing capacity or debt-to-income ratio, potentially limiting your ability to qualify for other financing.
Evaluating Your PMI Payment Options
“It’s important to evaluate the cost of each option on the savings each yields. Then, determine your breakeven point,” recommends Reed Letson, owner of Elevation Mortgage. “Remember that PMI will automatically drop off once you reach a 22% equity position. So it’s a good idea to know how many months it will take to reach that point and then compare how much you would pay in premiums versus how much a single or split-premium would cost.”
How to Avoid PMI: Alternatives to Traditional PMI
Of course, you can bypass PMI altogether with the right strategy. Here are your options:
Put down at least 20% if it’s a conventional loan.
Use a piggyback loan. A piggyback loan like an 80-10-10 loan involves taking two loans: one for 80% of the home's price and another for 10%, with you contributing a 10% down payment. This enables you to finance 90% of the home's value and avoid paying PMI.
Choose a non-conventional loan. A VA loan can be had for zero down without having to pay PMI, if you qualify (as a veteran, active duty military member, or surviving spouse). The same is true of a USDA home loan (although you must purchase in an approved rural location to be eligible).
Opt for LPMI. Having your lender pay for the PMI technically doesn’t require you to fund the cost, but instead you’ll pay a higher cost over the life of the loan if you plan to keep the mortgage long-term, per Natale.
How to Get Rid of PMI
Request PMI Removal Once You Reach 20% Equity
The good news is that, once you own at least one-fifth of your home outright – meaning you’ve reached the 20% equity point – you can contact your lender and request that PMI be removed. Or, PMI will be canceled automatically once your mortgage balance hits 78% (a 22% equity position).
“Just remember that the loan-to-value ratio in this scenario will be based on your home’s original purchase price, not its current value,” cautions Letson.
Keep in mind, too, that you can reach that 20% equity accrual earlier than expected if you make accelerated payments applied toward your principal.
Refinancing
If your property’s value has risen, consider a refi.
“If your home’s value has gone up or you’ve paid down your principal enough, refinancing to a new loan could drop the PMI,” Shepherd adds.
Appraisal
Heads up: A new home appraisal may be required to verify to your lender that you’ve earned 20% equity. A fresh appraisal can offer an accurate, professional assessment of your home's current market value.
Home Equity Loans
Taking out a home equity loan or home equity line of credit (HELOC) can help eliminate PMI faster by lowering your loan-to-value ratio, which determines the need for PMI. By using funds from a HELOC or home equity loan to pay down your primary mortgage, you reduce your LTV ratio, potentially reaching the point where your lender must remove PMI.
PMI vs. Other Types of Insurance and Fees
PMI isn’t the same as other types of insurance. Let’s compare and contrast these with PMI for a better understanding.
Homeowners insurance. This protects your property’s structure and personal belongings, providing valuable coverage in the event of damage caused by things like fire, theft, natural disasters, or vandalism.
FHA mortgage insurance premium (MIP). This is a form of insurance required by the lender when you opt for an FHA home loan. FHA loans generally require an upfront MIP paid at closing, along with an annual MIP that is spread out into monthly payments. If you make a down payment of at least 10%, MIP will automatically expire after 11 years. Refinancing into a conventional loan removes the MIP assuming you have 20% equity in the home.
VA funding fee. When you choose a VA home loan, you won’t pay PMI but you’ll have to pay a funding fee. This is a one-time charge paid at closing, ranging from 0.5% to 3.3% of the loan amount. The fee varies based on factors like the down payment, the loan purpose, and whether it's the first or subsequent use of the VA loan benefit.
USDA guarantee fee. This is charged when you select a USDA mortgage loan; it includes both an upfront and an annual fee. In 2025, the upfront fee is 1% of the loan amount, which can be paid at closing or rolled into the loan. The annual fee is 0.35% of the remaining mortgage balance, paid monthly as part of the mortgage payment until the loan is fully paid off.
The Pros and Cons of PMI
Just because you may be required to pay PMI doesn’t mean that it’s a completely negative outcome.
“Sure, it’s an extra cost, but it can help you buy a home sooner rather than waiting to save up 20%, which is especially appreciated by first-time buyers or those without significant savings,” says Shepherd. “For example, if home prices are rising, paying PMI might let you lock in a home now and build equity instead of falling behind in the market.”
PMI also enables real estate investors to enter the real estate market sooner and benefit from home value appreciation while improving credit with consistent repayment, according to Natale.
However, PMI adds to your total housing costs. You’ll need to pay it every month until it drops off if you opt for BPMI or split-premium PMI. Even if you choose LPMI or SPMI to avoid monthly fees, you’ll still have to come up with a sizable lump sum at closing.
“It’s an additional expense that doesn’t benefit the borrower or help you earn equity any sooner. PMI payments are also not tax deductible,” says Natale.
Making Informed Decisions About PMI
It’s smart to carefully consider the short- and long-term costs involved with private mortgage insurance and if making a down payment of less than 20% is worth it. Crunch the numbers and determine which choice – including down payment amount, type of loan, and PMI payment option – is in your best financial interest now and in the future. When in doubt, request guidance and insights from a trusted mortgage professional who can help you better understand PMI costs and options.
