What Is Private Mortgage Insurance?

If you’re considering buying a home, there are some costs associated with the mortgage loan process that people don’t always think of — including insurance. 

Your monthly mortgage payment is made up of PITI: Principal, Interest, Taxes, and Insurance. The insurance portion can include things like homeowners insurance, flood insurance, and, in some cases, private mortgage insurance (PMI) if you’re using a conventional loan. 

What Is Private Mortgage Insurance?  

Private mortgage insurance (PMI) is insurance your lender may require if you put down less than 20% of the purchase price of the home on a Conventional loan. 

It’s important to note: PMI protects the lender, not you. It reimburses them if you default on your mortgage payments. While it may feel like just another cost, PMI can actually help you qualify for a mortgage sooner by allowing you to buy a home with a lower down payment. 

How Much Does PMI Cost? 

PMI rates typically range from 0.5% to 1% of the total loan amount per year, though your exact cost will depend on factors like your credit score, how much you put down, and the type of loan you choose. 

For example, let’s say you’re buying a home for $230,000 with a 5% down payment. That would mean putting $11,500 down and financing $218,500 through your mortgage. 

At a PMI rate between 0.5% and 1%, you’d pay roughly $1,092 to $2,185 per year. Broken monthly, that’s about $91 to $182 added to your mortgage payment. 

Your lender will include the exact PMI cost in your Loan Estimate, so you’ll know what to expect before you close on your home. 

Do All Loans Require PMI? 

The short answer: no. PMI is generally required only on Conventional loans when you put down less than 20%. But some government-backed loans have their own type of mortgage insurance: 

• FHA loans require a Mortgage Insurance Premium (MIP), which stays in place for most or all of the loan. 

• VA loans and USDA Loans don’t require PMI at all! 

You may also have the option to avoid PMI by accepting a slightly higher interest rate. This approach spreads the cost over time through your monthly mortgage payment instead of as a separate line item. 

How Is PMI Paid? 

So, PMI can be structured in a few different ways, and knowing your options will help you choose what works best for your budget: 

Borrower-Paid PMI (Most Common) 

You, the borrower, pay the PMI premium directly. 

• Monthly premium: Added to your mortgage payment each month. 

• Upfront premium: Paid all at once at closing. 

• Hybrid option: A partial upfront payment combined with smaller monthly payments. 

Lender-Paid PMI 

Your lender pays the PMI premium upfront, but you’ll cover the cost indirectly through a slightly higher interest rate or a one-time higher upfront payment. This option might make your monthly payment appear simpler, but we recommend always comparing the total cost over the life of the loan. 

Expert Tip

And always ask your lender to show you a side-by-side comparison of borrower-paid vs. lender-paid PMI before deciding.

How To Remove PMI From Your Loan 

PMI doesn’t have to last forever. Here’s how you can eliminate it once you’ve built up enough equity. 

Request PMI Cancellation (at 80% LTV) 

Once your loan-to-value ratio (LTV) reaches 80%, you can request in writing to cancel your PMI. 

Steps to request PMI cancellation: 

1. Contact your lender to verify your current loan balance and the home’s original purchase price. 

2. Confirm that you’ve reached 80% LTV through payments or appreciation. 

3. Submit a written request to cancel your PMI. 

4. Provide proof of a good payment history and that there are no other liens (like a second mortgage). 

5. Be prepared to show that your home’s value hasn’t declined (this may require an appraisal). 

Automatic PMI Cancellation (at 78% LTV) 

If you don’t make a cancellation request, your lender must automatically cancel PMI once your LTV reaches 78% — so long as you’re current on your payments. 

Strategies to Avoid or Reduce PMI 

If you haven’t purchased your home yet, you can still lower or even avoid paying PMI altogether. Increasing your down payment, even by a small amount, can make a big difference. For example, bumping your down payment from 5% to 10% can make real headway in reducing your PMI costs over time. 

You can also explore local or state down payment assistance programs, which are designed to help first-time buyers cover some of their upfront costs. 

Finally, if you start out with PMI, it doesn’t have to stay forever. Once you’ve built enough equity or your home value has increased, you may be able to refinance into a new mortgage that’ll no longer require PMI. 

Why PMI Isn’t Always a “Bad Thing”  

Yes, PMI adds to your monthly costs, but it can also be a valuable tool for becoming a homeowner sooner. For many first-time buyers, saving a full 20% down payment isn’t realistic — especially when home prices may rise faster than your savings. 

So, we can think of PMI as a temporary steppingstone that helps you purchase a home now, with the goal of removing it later as you build equity. Before you close, take time to review your Loan Estimate with your Mortgage Banker carefully, ask plenty of questions, and work with your lender to choose the PMI structure that best fits your budget. Because the more informed you are now, the more confident you’ll feel throughout your homebuying journey! Connect with our team today to explore your options and take the next step toward homeownership.