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Private mortgage insurance (PMI) is an extra expense that conventional mortgage holders have to pay lenders each month. It typically applies to borrowers whose down payment on a home is less than 20 percent of the purchase price. Although the borrower is paying for it, PMI actually protects the lender. It compensates them for the extra risk they’re assuming by extending a larger loan, and demanding less cash upfront from you.
However, you won’t pay PMI forever. According to the Consumer Finance Protection Bureau, lenders must cancel it on the date your mortgage balance drops to 78 percent of your home’s original value (its worth when you bought it), or when you are halfway through your loan term.
Even before this scheduled date, once you pay down your mortgage balance to 80 percent of your home’s original value, you can request your lender to remove your PMI. Also, if your home’s value has grown to the point where you’d now have 20 percent equity, you can request PMI removal. However, you’ll likely have to pay for an appraisal to confirm the home’s worth.
PMI is not required in all cases. It is needed when you get a conventional mortgage with a down payment of less than 20 percent. FHA loans have their own type of mortgage insurance premiums that you’ll pay upfront and annually. VA loans don’t require PMI or any other type of mortgage insurance.
PMI PMI is a type of insurance that protects the lender should you default on your mortgage. It applies when you make a down payment under 20 percent.
MIP A mortgage insurance premium (MIP), is a type of mortgage insurance that comes with a Federal Housing Administration (FHA) insured mortgage. This includes an upfront premium, typically paid at closing, as well as annual premiums.
MPI This is a type of life insurance that pays off your mortgage when you die or become disabled.The average monthly cost of PMI is 0.46 percent to 1.5 percent of the loan amount, according to an analysis by the Urban Institute.
Here’s a look at how PMI might play out based on how much you put down, according to the Freddie Mac mortgage insurance calculator and the Bankrate mortgage calculator. These examples assume a $410,000 home purchase price and a 7.96 percent interest rate.
| Down payment | 5% down | 10% down | 15% down | 20% down |
|---|---|---|---|---|
| Note: The total monthly mortgage payments in this table don’t include homeowners insurance, HOA fees or property taxes. | ||||
| Monthly PMI payment | $374 | $240 | $98 | $0 |
| Monthly mortgage payment | $2,847 | $2,697 | $2,547 | $2,398 |
| Total monthly mortgage payment | $3,221 | $2,937 | $2,645 | $2,398 |
Say you make a 10 percent down payment on a $410,000 home. That equals $41,000. You’ll get a 30-year fixed-rate mortgage at 7.96 percent to pay the remaining $369,000 of the home’s purchase price. Because your down payment isn’t 20 percent, you’ll pay mortgage insurance premiums, but only until you pay down your loan balance to 80 percent, or $328,000. If you follow the repayment schedule, you’ll hit this mark a little over nine years into the loan.
Borrower-paid PMI is what people generally mean when they refer to mortgage insurance. With borrower-paid PMI, the premiums are part of your monthly mortgage payment. You’ll be able to stop paying them once you reach 20 percent equity in your home — if you request cancellation — or automatically when your mortgage balance reaches 78 percent of your home’s value.
Lender-paid mortgage insurance might sound appealing, but make no mistake: You’ll still pay for the coverage. Instead of seeing that premium as a line item on your mortgage statement, you’ll pay a higher interest rate on the loan. You can’t get lender-paid PMI canceled in the same way that you can with borrower-paid insurance, either. The main path to getting out of lender-paid PMI is to refinance.
Instead of dividing up payments into regular installments each month, single-premium PMI bundles the entire cost of the premiums into one lump payment. Depending on the terms of the loan, you can either pay this in full at closing or roll the amount into the loan for a higher balance. If you pay it upfront, you’ll get the benefit of lower monthly mortgage payments. You might not have the funds to make this happen, however. Plus, if you sell your home before you would have stopped paying PMI, you might wind up worse off. In that case, you paid premiums in advance for nothing.
In a split-premium PMI arrangement, you’ll pay a larger upfront fee that covers part of the overall insurance costs; you’ll pay the remainder with your monthly payments. This strategy combines the pros and cons of single-premium and borrower-paid PMI. You need some cash, but not as much, to pay the upfront premium, and your monthly payments won’t be as high. Split-premium mortgage insurance can also be helpful if you have a debt-to-income (DTI) ratio that’s on the high side. It allows you to lower your potential mortgage payment to avoid pushing your DTI too high to qualify for the loan.
Paying PMI comes with one major benefit: It enables you to buy a home without waiting until you can afford a 20 percent down payment. Home prices remain high, at a median of $384,500 nationally as of Feb. 2024, according to the National Association of Realtors.
Homeownership is generally an effective long-term and generational wealth-building tool. Buying a property sooner rather than later allows you to acquire an important asset and start building equity. If home prices in your area rise at a percentage that’s higher than what you’re paying for PMI, then your monthly premiums — costly as they are — are actually helping you net a positive return.
The typical U.S. home sells for close to $400,000, and coming up with a 20 percent down payment means writing a check for $80,000. Many first-time buyers don’t have that much money. So even though paying private mortgage insurance isn’t anyone’s favorite thing to do, the upside is that PMI lets buyers get into a challenging housing market even if they haven’t amassed a stash of cash. — Jeff Ostrowski, Principal Writer, Bankrate
In some cases, it is possible to avoid paying private mortgage insurance. Here are some of the ways to do it:
There are a few ways to get rid of PMI:
There are three main ways to make PMI payments. Your options may vary depending on your lender:
Virtually every lender requires PMI for conventional mortgages with a down payment less than 20 percent. Some lenders advertise “no-PMI” loans, but these are essentially lender-paid insurance arrangements — you’ll likely pay a higher interest rate in exchange.
You’ll pay PMI until you’ve reached 20 percent equity in your home, or an 80 percent loan-to-value (LTV) ratio on your mortgage. Loan servicers must cancel PMI once you reach a 78 percent LTV ratio, based on the home’s original appraised value, or halfway through your loan’s term (15 years into a 30-year mortgage, for example).
PMI was tax-deductible through the 2021 tax year. It expired for the 2022 tax year and has not been renewed for subsequent years.
Mortgage insurance protects your lender in the event you don’t pay back your mortgage. Homeowners insurance protects you and your home in case something happens to it. Lenders require mortgage insurance if you’re getting a conventional loan and putting less than 20 percent down; they also require homeowners insurance for any type of mortgage.
Andrew Dehan writes about real estate and personal finance. His work has been published by Rocket Mortgage, Forbes Advisor and Business Insider. He’s also a poet, musician and nature-lover. He lives in metro Detroit with his wife and children.
