If you can’t afford a massive down payment on a house, your lender may require you to pay for private mortgage insurance (PMI). This extra fee compensates the lender for the additional risks of lending to you and increases your total mortgage payment.
But why and when is it required? And how can you avoid it when looking for a mortgage?
What Is PMI, and Why Is It Required?
Private mortgage insurance is a type of insurance designed to protect the lender, rather than the borrower, in case you stop making payments on your loan. It’s typically required when a borrower puts down less than 20 percent of the home’s purchase price.
From the lender’s perspective, loans with smaller down payments carry more risk. With less equity in the home, borrowers are statistically more likely to default. PMI serves as a financial cushion for the lender in these higher-risk situations.
That doesn’t mean PMI is a penalty or red flag; it’s simply a risk-management tool that makes low-down-payment loans possible. Without PMI, many buyers would be locked out of the market until they could save up for a full 20 percent down payment, which can take many years in today’s housing landscape.
How PMI Is Paid
Most homebuyers pay PMI as a monthly premium added to their mortgage payment, but there are a few different options, depending on the lender and loan type:
- Monthly PMI is the most common. It appears as a separate line item on your mortgage statement and continues until you reach a certain equity threshold.
- Upfront PMI is paid as a one-time fee at closing. This avoids a monthly charge but can be costly upfront.
- Split-premium PMI allows you to pay part upfront and the rest monthly, providing some payment flexibility.
If you’re offered options, your lender or mortgage advisor can help you compare the long-term cost differences between monthly and upfront PMI.
How Much Does PMI Cost?
The cost of PMI depends on several factors, including the size of your down payment, your credit score, your loan amount, and the loan type. On average, PMI costs range from 0.3 to 1.5 percent of the original loan amount per year. Accordingly, on a $300,000 mortgage, PMI might add between $75 and $375 to your monthly payment.
The more you put down and the better your credit score, the lower your PMI rate is likely to be. That’s why it’s worth trying to strengthen your credit and save as much as possible before applying for a loan: even a small difference in PMI can add up over time.
When Can You Get Rid of PMI?
The good news is that PMI doesn’t last forever, and in most cases, you don’t have to refinance to eliminate it. If you have a conventional loan, federal law gives you a few clear paths to eliminate your PMI. Once your loan-to-value (LTV) ratio hits 78 percent based on the original purchase price, your lender is required to remove PMI automatically, assuming you’re current on payments. When your LTV reaches 80 percent, you can request removal. This is the more proactive route, and many borrowers don’t realize they can do this before the automatic cancellation kicks in at 78 percent.
If your home has appreciated in value, you may reach that 80 percent threshold faster than expected. In this case, you can request a new appraisal and ask for early PMI cancellation based on the current market value, though lenders may charge for the appraisal and require a solid payment history.
Should You Try to Avoid PMI Altogether?
Avoiding PMI by putting 20 percent down is certainly ideal, but it’s not always realistic or even necessary. For many buyers, especially in fast-moving or high-priced housing markets, waiting to hit that 20 percent mark can mean missing out on a good opportunity. If you’re financially stable and confident in your ability to afford the full monthly payment (PMI included), it often makes sense to move forward.
That said, if you’re close to the 20 percent threshold, it might be worth waiting and saving a bit more, especially if it brings your monthly costs down meaningfully. Talk to your lender about how different down payment levels will affect your PMI costs and break-even timeline.
Final Thoughts on PMI
PMI isn’t always a bad thing. It can be a tool that opens doors for homebuyers who are ready to purchase but don’t have a large down payment. While it does increase your monthly costs, it also gives you access to the housing market earlier, allowing you to start building equity and benefiting from home appreciation sooner. The key is to understand how it works, so you can avoid it or find the best ways to use it to your advantage.
