PMI Explained: What Is Private Mortgage Insurance & How to Avoid It

What Is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is an insurance policy that protects your lender — not you — if you default on your mortgage. It is required on conventional loans when your down payment is less than 20% of the home's purchase price. PMI adds $100-$300+ per month to your housing payment depending on your loan amount and credit score.

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 your credit score, down payment percentage, and loan type.

Example: On a $300,000 loan with a PMI rate of 0.8%, you would pay $2,400 per year or $200 per month in PMI premiums.

Factors that affect your PMI rate:

• Credit score: Higher score = lower PMI rate. A 760+ score may pay 0.3% while a 680 score pays 1.0%+
• Down payment: Larger down payments (15% vs 5%) reduce PMI rates
• Loan type: Fixed-rate loans have lower PMI than adjustable-rate
• Occupancy: Primary residence has the lowest PMI rates

PMI vs MIP: What Is the Difference?

PMI applies to conventional loans. MIP (Mortgage Insurance Premium) applies to FHA loans. The key difference: PMI can be removed once you reach 20% equity, while FHA MIP typically stays for the life of the loan (unless you put down 10%+, in which case MIP drops off after 11 years). This difference makes conventional loans cheaper long-term for buyers who start with less than 20% down. See our FHA vs Conventional comparison for more details.

How to Remove PMI

You have several options to get rid of PMI:

1. Automatic termination: Your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price
2. Request cancellation at 80%: You can request PMI removal when you reach 80% LTV — this requires a good payment history and may require an appraisal
3. Home value appreciation: If your home has increased in value, you may reach 80% LTV sooner than scheduled. You will need a new appraisal to prove it
4. Refinance: If your home has appreciated significantly, refinancing into a new loan without PMI can save money

5 Strategies to Avoid PMI Entirely

1. Save for 20% down: The most straightforward approach. On a $350,000 home, that is $70,000
2. Piggyback loan (80-10-10): Put 10% down, get a primary mortgage for 80%, and a second mortgage (HELOC) for the remaining 10%. No PMI required since the primary loan is 80% LTV
3. Lender-paid PMI (LPMI): Some lenders offer to pay your PMI in exchange for a higher interest rate. Good if you plan to keep the loan long-term
4. VA loan: Veterans and active military qualify for VA loans with 0% down and no PMI
5. Use DPA programs: Some down payment assistance programs can get you to 20% and eliminate PMI

Is PMI Worth It?

Despite the extra cost, PMI is not always bad. It allows you to buy a home years earlier than waiting to save 20%. If home prices appreciate 3-5% per year, waiting to save 20% could mean paying $30,000-$50,000 more for the same home while continuing to pay rent.

The key question: Is the PMI cost less than the appreciation you would miss by waiting? In most markets, yes — buying now with PMI beats waiting to reach 20% down.

Use our Home Affordability Calculator to see how PMI affects your monthly payment and buying power at different down payment levels.