What Is PMI and How to Avoid It?
Private mortgage insurance (PMI) protects your lender — not you — if you stop making payments. Lenders typically require it on conventional loans when your down payment is less than 20% of the home's price.
Why Lenders Require PMI
When you put down less than 20%, the lender is financing a larger share of the home's value and takes on more risk if the loan defaults and the home sells for less than the balance owed. PMI offsets that risk. It does not protect you or replace homeowners insurance — if you fall behind, you can still lose the home, and the insurer can pursue you for what it pays out. In short, PMI is the price of buying with a smaller down payment.
How Much Does PMI Cost?
PMI usually runs between 0.5% and 1.5% of the loan amount per year, billed monthly. On a $300,000 loan, that's roughly $125 to $375 a month. Your rate depends mainly on your credit score and your loan-to-value ratio — a higher score and a larger down payment both lower the premium. Because PMI is tied to the loan amount, it shrinks in relative terms as you pay the balance down.
Types of PMI
Not all PMI works the same way:
- Borrower-paid PMI (BPMI) is the most common: a monthly premium added to your payment that you can cancel once you build enough equity.
- Lender-paid PMI (LPMI) folds the cost into a slightly higher interest rate. The payment looks lower, but the rate — and the cost — last for the life of the loan unless you refinance.
- Single-premium PMI is paid once upfront, either in cash or financed into the loan, with no monthly charge.
Note that PMI applies to conventional loans. FHA loans carry a separate mortgage insurance premium (MIP) that often lasts the life of the loan, which is one reason borrowers refinance from FHA into a conventional loan once they have enough equity.
How to Avoid PMI
- Put down 20% or more. This is the most direct way to skip PMI entirely.
- Consider a piggyback loan. An 80/10/10 structure splits financing so your primary mortgage stays at 80% of the value.
- Look at lender-paid PMI. The cost is folded into a slightly higher interest rate, which can make sense if you'll move or refinance soon.
- Compare loan programs. A VA loan (for eligible borrowers) requires no mortgage insurance at all.
How to Cancel PMI
For borrower-paid PMI, federal rules under the Homeowners Protection Act give you two milestones. Once your balance reaches 80% of the original value (about 20% equity), you can request cancellation in writing. At 78% of the original value (about 22% equity), the lender must remove it automatically, as long as you're current on payments. You may also reach the threshold sooner if your home appreciates — in that case a new appraisal may be required.
Paying a little extra toward principal each month gets you to 20% equity faster. See how much sooner with our mortgage payoff calculator, and use the mortgage payment calculator to estimate your payment with and without PMI before you commit.
