What Is PMI and How Can You Avoid It?

If you've started looking into buying a home, you've probably run into the term "PMI" and immediately wondered how much it'll cost you. Private mortgage insurance is one of those extra costs that catches first-time buyers off guard. It can add $100 to $300 or more to your monthly payment, and it doesn't benefit you at all. It protects the lender, not you. But here's the good news: PMI isn't permanent, and there are several ways to avoid it entirely.

What Is Private Mortgage Insurance?

PMI is an insurance policy that protects your mortgage lender in case you default on your loan. When you make a down payment of less than 20% of the home's purchase price, lenders consider you a higher-risk borrower. PMI reduces their financial exposure. If you stop making payments and the lender has to foreclose, PMI covers a portion of their losses.

It's important to understand what PMI doesn't do. It doesn't protect you if you lose your job. It doesn't cover your equity. It doesn't help you in any way. You're paying for insurance that exclusively benefits the bank. That's why most homeowners want to get rid of it as soon as possible.

How Much Does PMI Cost?

PMI typically costs between 0.5% and 1.5% of your original loan amount per year. The exact rate depends on several factors:

• Your credit score: Higher scores get lower PMI rates. A borrower with a 760+ credit score might pay 0.3-0.5% annually, while someone with a 660 score could pay 1.0-1.5%.
• Your down payment amount: The closer you are to 20%, the lower your PMI rate. Putting 15% down costs less than putting 5% down.
• Your loan type: Conventional loans have removable PMI. FHA loans have mortgage insurance premiums (MIP) with different rules.
• The loan-to-value ratio (LTV): This is the percentage of the home's value that you're borrowing. Lower LTV means lower PMI.

Let's put real numbers to this. On a $350,000 home with 10% down, you're borrowing $315,000. At a PMI rate of 0.7%, you'd pay $2,205 per year, or about $184 per month. Over the years it takes to reach 20% equity, you could pay $8,000 to $12,000 in PMI - money that goes entirely to insurance you'll never benefit from.

See How PMI Affects Your Payment

Use the mortgage calculator below to see how PMI impacts your monthly payment. Try different down payment amounts to see how the PMI cost changes, and compare the total monthly payment at 10% down versus 20% down.

When Does PMI Go Away?

Under the Homeowners Protection Act of 1998, there are specific rules about when PMI must be removed from conventional loans:

• You can request removal at 80% LTV: Once your mortgage balance reaches 80% of the home's original appraised value (or purchase price, whichever is lower), you can ask your lender to cancel PMI. You need to be current on payments and have a good payment history.
• Automatic removal at 78% LTV: Your lender is legally required to automatically cancel PMI once your balance drops to 78% of the original value, as long as you're current on payments.
• Midpoint termination: Even if you haven't reached 78% LTV, PMI must be terminated at the midpoint of your loan's amortization schedule. For a 30-year mortgage, that's at year 15.

There's an important distinction here: these rules are based on the original purchase price or appraised value, not the current market value. If your home has appreciated significantly, you might have a separate path to removing PMI early.

How to Remove PMI Early

Don't wait for the automatic removal date. There are proactive steps you can take:

1. Make extra principal payments: Paying even $100-200 extra per month toward principal accelerates when you hit that 80% LTV threshold. Direct your lender to apply extra payments to principal, not future payments.
2. Get a new appraisal: If your home has increased in value due to market appreciation or renovations, a new appraisal could show that your LTV is already below 80%. Some lenders allow you to use a new appraisal to request PMI removal, though policies vary.
3. Refinance: If your home's value has increased enough and rates are favorable, refinancing into a new loan at less than 80% LTV eliminates PMI. Just make sure the refinancing costs don't outweigh the PMI savings.

Keep track of your amortization schedule and know exactly when you'll hit 80% LTV. Mark the date on your calendar. Lenders don't always proactively notify you when you're eligible for removal - you may need to initiate the request.

How to Avoid PMI Entirely

If you want to skip PMI altogether, you have several options:

• Save a 20% down payment: The most straightforward approach. On a $350,000 home, that's $70,000. It's a lot of money, but it eliminates PMI from day one and reduces your monthly payment and total interest.
• Piggyback loans (80-10-10): Take a primary mortgage for 80% of the home price, a second smaller loan (home equity loan or HELOC) for 10%, and put 10% down. The first mortgage has no PMI since it's at 80% LTV. The second loan has a higher interest rate but may still cost less than PMI overall.
• Lender-paid PMI (LPMI): Some lenders offer to pay your PMI in exchange for a slightly higher interest rate. The catch is that this higher rate is permanent - you can't remove LPMI since it's baked into the rate. Run the numbers carefully to see if this makes sense over your expected time in the home.
• VA loans: If you're a veteran or active-duty military member, VA loans require no down payment and no PMI. There's a one-time funding fee, but no ongoing monthly insurance cost.

FHA Loans: A Different Set of Rules

FHA loans have their own version of mortgage insurance called MIP (mortgage insurance premium). The rules are stricter than conventional PMI:

• Upfront MIP: FHA charges 1.75% of the loan amount at closing. On a $315,000 loan, that's $5,513, which is usually rolled into the loan balance.
• Annual MIP: An ongoing premium of 0.55% of the loan balance, paid monthly. That's about $144 per month on a $315,000 loan.
• Duration: If you put less than 10% down on an FHA loan, MIP lasts for the life of the loan. You can't remove it. The only way to eliminate it is to refinance into a conventional loan once you have 20% equity.

This lifetime MIP requirement is a significant downside of FHA loans that many first-time buyers don't realize until they're already locked in. If you're close to qualifying for a conventional loan, the removable PMI makes it worth stretching a bit to avoid FHA.

Is It Worth Waiting to Save 20%?

This is the big question, and there's no universal answer. Saving 20% can take years, during which home prices and rents may increase. In some markets, you'd be chasing a moving target. On the other hand, PMI is a real cost that adds up.

Consider this: if putting 10% down means paying $184/month in PMI for 5 years, that's $11,040 in total PMI costs. If home prices in your area are rising 4-5% per year, waiting two extra years to save the full 20% could mean the same house costs $28,000-$35,000 more. In that scenario, paying PMI and buying sooner might actually be the financially smarter move.

The math depends entirely on your local market, your savings rate, and how quickly you can eliminate PMI once you're in the home.

The Bottom Line

PMI isn't ideal, but it's not the dealbreaker some people make it out to be. It's the cost of getting into a home sooner with less cash upfront. What matters most is understanding exactly what you're paying, how long you'll pay it, and having a plan to eliminate it. If you can put 20% down without depleting your emergency fund, great - do it and skip PMI entirely. If you can't, buy with a smaller down payment, budget for PMI, and work toward that 80% LTV milestone. Either way, go in with your eyes open.