What is PMI and How Much Does It Cost?

What is PMI?

PMI (Private Mortgage Insurance) is insurance that protects your lender—not you—if you default on your mortgage. Despite the name, it doesn't protect you as the borrower. It's a risk mitigation tool for lenders when you put down less than 20% on a conventional loan.

Here's the key: PMI is not a permanent cost. It's a temporary fee you pay until you've built sufficient equity in your home. Understanding how it works can save you thousands over the life of your loan.

When Do You Need PMI?

You'll typically need PMI if:

• You're getting a conventional loan (not FHA, VA, or USDA)
• Your down payment is less than 20% of the purchase price
• Your loan-to-value ratio (LTV) is above 80%

Important: FHA loans have their own version called MIP (Mortgage Insurance Premium), which works differently. VA loans don't require any mortgage insurance at all.

How Much Does PMI Cost?

PMI typically costs 0.5% to 1.5% of your loan amount per year, paid monthly. The exact rate depends on:

• Your credit score (higher score = lower PMI)
• Your down payment size (larger down payment = lower PMI)
• Your loan type and term
• Your debt-to-income ratio

Real Cost Examples

Let's look at actual numbers:

• $300,000 loan at 0.5% PMI: $125/month or $1,500/year
• $300,000 loan at 1.0% PMI: $250/month or $3,000/year
• $500,000 loan at 0.8% PMI: $333/month or $4,000/year

Over 5-7 years (typical PMI duration), you're looking at $9,000 to $28,000 in total PMI costs on a $300,000-$500,000 home. That's why removing it as soon as possible matters.

How to Remove PMI

Good news: PMI isn't forever. You can remove it when:

1. Automatic Removal (78% LTV)

Your lender must automatically cancel PMI when your loan balance reaches 78% of the original home value, assuming you're current on payments.

2. Request Removal (80% LTV)

You can request PMI removal once you reach 80% LTV through regular payments. Your lender may require:

• Written request
• Good payment history
• Verification that no secondary liens exist
• Sometimes a new appraisal (at your expense, usually $400-600)

3. Home Value Appreciation

If your home has increased in value significantly, you might reach 80% LTV faster than expected. Request a new appraisal to prove this. If your home appreciated from $400,000 to $450,000, your LTV ratio improved without you paying down the loan at all.

4. Refinancing

If rates have dropped or your home value increased substantially, refinancing to a new loan without PMI might make sense—especially if you can refinance into a lower rate simultaneously.

Is PMI Worth It?

PMI gets a bad rap, but it's not always the enemy. Here's when PMI makes sense:

• You'd otherwise wait years to save 20% down—missing appreciation and building equity sooner
• Your market is appreciating rapidly—the opportunity cost of waiting exceeds PMI costs
• Interest rates are rising—locking in today's rate might save more than PMI costs
• You have strong income but limited savings—PMI lets you buy sooner while keeping cash reserves

The math: If homes in your area are appreciating 5-8% annually and PMI costs you 0.8% of your loan amount, buying sooner with PMI often wins financially.

Key Takeaways

• PMI protects the lender, not you, and costs 0.5-1.5% of your loan annually
• You need PMI on conventional loans with less than 20% down
• PMI automatically ends at 78% LTV, or you can request removal at 80% LTV
• Track your equity—don't wait for your lender to notify you
• PMI isn't always bad; sometimes buying sooner with PMI beats waiting

Related Reading

• Down Payment Strategies: How Much Do You Really Need?
• The First-Time Homebuyer's Complete Guide
• The Math Behind Home Affordability