Private Mortgage Insurance (PMI): What It Is, Costs & How to Avoid It

Private mortgage insurance (PMI) is an extra monthly cost that many homebuyers face when they can't put 20% down on a conventional loan—but here's the key thing to understand: PMI protects your lender, not you. If you're buying a home with less than 20% down, you'll likely pay between $30 and $70 per month for every $100,000 borrowed, according to Freddie Mac. That means on a $350,000 loan, you could be paying $105 to $245 monthly until you build enough equity. The good news? PMI isn't permanent, and there are multiple strategies to avoid it entirely or remove it sooner. This guide covers everything you need to know about PMI costs, cancellation rules, and alternatives that could save you thousands.

What Is Private Mortgage Insurance?

Private mortgage insurance is a type of insurance policy that protects mortgage lenders—not borrowers—if a homeowner stops making payments and defaults on their loan. When you make a down payment of less than 20% on a conventional loan, lenders require PMI because you represent a higher risk.

Here's why: with a smaller down payment, you own less equity in your home from the start. If you default and the lender has to foreclose and sell the property, they're more likely to lose money. PMI provides a financial safety net that reimburses lenders for a portion of their losses in this scenario.

Despite protecting the lender rather than you, PMI serves an important purpose for homebuyers: it enables you to purchase a home with less than 20% down. Without PMI, many lenders wouldn't offer mortgages to borrowers who can't make larger down payments, which would shut many first-time homebuyers out of the market entirely.

When Is PMI Required?

PMI is required on conventional mortgages whenever the down payment is less than 20% of the home's purchase price. This applies in several situations:

New home purchases: If you're buying a home and putting down less than 20%, you'll need PMI. For example, purchasing a $400,000 home with a 10% down payment ($40,000) means you'll be required to carry PMI.

Refinancing: If you refinance your mortgage and have less than 20% equity in your home, PMI will typically be required on the new loan.

Loan-to-value (LTV) ratio: The key metric lenders use is your loan-to-value ratio—the amount you're borrowing divided by the home's value. When your LTV exceeds 80%, PMI is required.

It's important to understand that PMI specifically applies to conventional loans. Government-backed loans like FHA loans and VA loans have different mortgage insurance structures, which we'll cover later in this article.

How Much Does PMI Cost?

According to Freddie Mac, PMI typically costs between $30 and $70 per month for every $100,000 borrowed. However, your actual cost depends on several factors that can significantly raise or lower this range.

Here's what PMI might cost based on your loan amount:

Factors That Affect Your PMI Cost

Credit score: This is the biggest factor affecting your PMI rate. Borrowers with excellent credit (760+) pay significantly less than those with lower scores. According to Investopedia, the difference can be substantial—sometimes half the cost or less for borrowers with excellent credit.

Down payment amount: The larger your down payment (even if under 20%), the lower your PMI cost. Someone putting 15% down will pay less than someone putting 5% down because they're borrowing less relative to the home's value.

Loan-to-value ratio: Related to down payment, your LTV directly impacts PMI pricing. Higher LTV means higher risk for the lender, which translates to higher PMI costs.

Loan amount: The more you borrow, the more you pay in total PMI dollars (though the rate percentage may be similar).

Loan type: Adjustable-rate mortgages (ARMs) may carry higher PMI costs than fixed-rate mortgages because of the increased risk from potential payment changes.

Property type: Investment properties and second homes typically have higher PMI requirements than primary residences.

PMI vs. FHA Mortgage Insurance (MIP)

One of the most common points of confusion for homebuyers is the difference between PMI on conventional loans and mortgage insurance premium (MIP) on FHA loans. While both protect lenders and add to your monthly costs, they work quite differently.

The Key Difference: Cancellation Rules

The most significant difference is cancellation. With conventional PMI, you can request cancellation when you reach 80% LTV, and it's automatically removed at 78% LTV. FHA MIP follows different rules:

• Down payment less than 10%: MIP is required for the entire life of the loan—it never goes away unless you refinance into a conventional loan
• Down payment of 10% or more: MIP automatically cancels after 11 years

According to the Urban Institute, borrowers with credit scores under 760 often pay less total with FHA MIP than conventional PMI. However, borrowers with scores above 760 typically save money with conventional PMI because they qualify for the lowest rates and can cancel it sooner.

How PMI Is Paid

There are four main ways to pay for PMI, each with its own advantages and considerations. Understanding these options can help you choose the most cost-effective approach for your situation.

1. Monthly Premium (Most Common)

The most popular option is paying PMI as part of your regular monthly mortgage payment. Your PMI is simply added to your principal, interest, taxes, and insurance payment.

Pros:

• Easiest to budget—one consistent payment
• Automatically ends when you reach cancellation thresholds
• No large upfront cost at closing

Cons:

• Higher monthly payment while PMI is active

2. Upfront Premium (Single Premium)

You can pay your entire PMI cost as a one-time payment at closing. This appears on your Loan Estimate and Closing Disclosure documents.

Pros:

• Lower monthly payments during PMI period
• May save money if you stay in the home long-term

Cons:

• Large upfront cost at closing
• Generally not refundable if you move or refinance early
• Ties up cash that could earn returns elsewhere

3. Split Premium

A combination approach where you pay a partial amount upfront at closing plus reduced monthly premiums. This spreads the cost while still lowering your monthly payment compared to the monthly-only option.

4. Lender-Paid Mortgage Insurance (LPMI)

With LPMI, your lender pays the PMI cost in exchange for charging you a higher interest rate. The PMI payment effectively disappears, replaced by a higher rate for the life of your loan.

Pros:

• No separate PMI payment
• Potentially higher mortgage interest tax deduction

Cons:

• Higher interest rate lasts the entire loan term
• Cannot be removed like borrower-paid PMI
• May cost more over the loan's life

Tax Considerations

The itemized deduction for mortgage insurance premiums has expired and is no longer available. According to IRS Publication 936, you can no longer claim this deduction. While Congress has renewed this benefit multiple times in the past (most recently through 2021), there is currently no active legislation extending it. Consult with a tax professional for the most up-to-date guidance on your specific situation.

7 Strategies to Avoid PMI

While PMI enables homeownership with smaller down payments, avoiding it when possible saves money. Here are seven strategies to purchase a home without PMI:

1. Make a 20% Down Payment

The most straightforward approach is simply putting 20% down. Beyond avoiding PMI, this also typically qualifies you for better interest rates, gives you immediate equity, and reduces your loan amount.

If you're working toward this goal, consider creating a dedicated budget to accelerate your savings. Even reaching 15% down and then making extra payments to hit 80% LTV quickly can reduce your total PMI costs significantly.

2. VA Loans for Military Members

VA loans offer exceptional benefits for eligible active-duty service members, veterans, and surviving spouses:

• No down payment required
• No PMI required
• Competitive interest rates
• One-time funding fee (1.25%-3.3%) instead of ongoing insurance

The funding fee is significantly less expensive than years of PMI payments, making VA loans one of the best mortgage products available.

3. USDA Loans for Rural Buyers

USDA loans serve buyers in designated rural and suburban areas with moderate incomes:

• No down payment required
• No traditional PMI
• Guarantee fees instead (0.60-0.65% upfront plus 0.25-0.35% annually)

While USDA loans have geographic and income restrictions, they're an excellent PMI-free option for eligible buyers.

4. Piggyback Loans (80-10-10)

A piggyback loan structure lets you avoid PMI by taking out two loans simultaneously:

• First mortgage: 80% of the home's value (no PMI required)
• Second mortgage: 10% of the home's value
• Your down payment: 10%

Since your first mortgage is exactly 80% LTV, PMI isn't required. However, the second mortgage typically carries a higher interest rate, and you'll need strong credit to qualify for two loans. Calculate whether the combined cost beats what you'd pay with PMI.

5. Lender-Paid Mortgage Insurance

As discussed earlier, LPMI trades a separate PMI payment for a higher interest rate. This might make sense if you plan to keep the loan for a shorter period, but run the numbers carefully before choosing this option.

6. Physician and Professional Loans

Many lenders offer special loan programs for doctors, dentists, attorneys, and other professionals. These programs often:

• Require no PMI despite low down payments
• Don't count student loan debt in debt-to-income calculations
• Offer competitive rates for high-earning professionals

If you're in an eligible profession, these programs can provide significant savings.

7. State Housing Finance Agency Programs

Most states offer homebuyer assistance programs through their housing finance agencies. Many include:

• Reduced mortgage insurance costs
• Below-market interest rates
• Down payment assistance
• First-time buyer grants

Check your state's housing finance agency website to see what programs you might qualify for.

How to Remove PMI from Your Mortgage

Thanks to the Homeowners Protection Act of 1998—also known as the PMI Cancellation Act—you have legal rights to remove PMI from your mortgage under certain conditions. This law is enforced by the Consumer Financial Protection Bureau (CFPB) and applies to residential mortgages closed on or after July 29, 1999.

Three Ways PMI Ends

1. Borrower-Requested Cancellation (80% LTV)

You can request PMI cancellation when your loan balance reaches 80% of your home's original value. To qualify:

• Submit a written request to your mortgage servicer
• Be current on your payments
• Have a good payment history (no more than one 30-day late payment in the past 12 months, or one 60-day late payment in the past 24 months, per Fannie Mae/Freddie Mac guidelines)
• Certify that you have no other liens on the property
• Provide evidence (usually a new appraisal you pay for) that your home's value hasn't declined

Important: "Original value" typically means the lower of the purchase price or appraised value when you bought the home. For refinances, it's the appraised value at refinancing.

2. Automatic Termination (78% LTV)

Your lender must automatically terminate PMI when your loan balance reaches 78% of the original value based on the original payment schedule. This happens automatically—you don't need to request it.

Requirements:

• You must be current on payments
• If you've fallen behind, automatic termination is delayed until you catch up

3. Final Termination (Loan Midpoint)

Even if you haven't reached 78% LTV, lenders must end PMI the month after your loan reaches the midpoint of its amortization schedule:

• 30-year loan: PMI ends after 15 years
• 15-year loan: PMI ends after 7.5 years

This provision protects borrowers with loans that have interest-only periods or other features that slow principal reduction.

Canceling PMI Early Due to Home Appreciation

If your home's value has increased significantly—whether from market appreciation or improvements you've made—you may reach 80% LTV faster than your original payment schedule predicted. Here's how to cancel early:

1. Contact your loan servicer to request cancellation
2. The lender will typically require a new appraisal
3. You pay for the appraisal (usually $300-$500)
4. If the appraisal confirms your home's new value puts you at or below 80% LTV, PMI can be canceled

This can be particularly valuable in strong housing markets where values rise quickly.

PMI Cancellation Timeline

Understanding when you can expect to remove PMI helps with financial planning. Here's a quick reference:

Example Timeline

Let's say you purchase a $400,000 home with 10% down ($40,000), taking a $360,000 loan at 6.5% interest over 30 years:

• Starting LTV: 90%
• 80% LTV threshold: When loan balance reaches $320,000
• Approximate time to reach 80%: 7-8 years with normal payments
• 78% automatic termination: Around year 8-9
• Final termination: Year 15 (loan midpoint)

By making extra principal payments, you can reach the 80% threshold faster and request cancellation sooner.

Frequently Asked Questions

Conclusion

Private mortgage insurance represents a significant cost for homebuyers who can't put 20% down, but it's not a permanent burden. Understanding how PMI works—from the factors affecting your costs to the legal protections guaranteeing your right to cancellation—puts you in control of this expense.

The key takeaways to remember: PMI typically costs $30-$70 monthly per $100,000 borrowed, with your credit score being the biggest factor in your rate. You can request cancellation at 80% LTV or wait for automatic removal at 78% LTV under the Homeowners Protection Act. And if paying PMI doesn't work for your budget, alternatives like VA loans, USDA loans, or piggyback loan structures can help you avoid it entirely.

Whether you're a first-time homebuyer weighing your options or a current homeowner ready to cancel your PMI, understanding these rules helps you make smarter financial decisions. Focus on improving your credit score, consider accelerating principal payments to reach cancellation thresholds faster, and don't forget to contact your servicer when you hit that 80% LTV mark—they won't always remind you that cancellation is available.

For most homebuyers, paying PMI for a few years is a reasonable trade-off that makes homeownership possible sooner. Just make sure you have a plan to eliminate it as quickly as your finances allow.