Private Mortgage Insurance is the fee you pay the lender for the privilege of not putting 20% down. It's not a scam, and it's not a benefit to you. It protects the bank if you default. Understanding how it works is the difference between paying it for two years and paying it for twelve.
What PMI Is, In One Sentence
PMI is an insurance policy the lender buys (and bills you for) on mortgages where your loan-to-value ratio is above 80%. If you default and the foreclosure sale doesn't cover the loan, the insurer pays the lender. You get nothing from it.
It applies to conventional loans with less than 20% down. FHA loans have a different thing called MIP (Mortgage Insurance Premium), and VA loans have neither, just a one-time funding fee.
What It Costs
PMI runs roughly 0.3% to 1.5% of the loan amount per year, billed monthly. The rate depends on:
- Your credit score. The biggest factor. A 760+ score might pay 0.3%; a 620 score could pay 1.5% or more.
- Your loan-to-value ratio. 95% LTV costs more than 90%, which costs more than 85%.
- Loan term. 30-year loans carry higher PMI than 15-year because the lender's exposure lasts longer.
- Property type. Second homes, investment properties, and multi-unit buildings all bump the rate.
On a $400,000 loan at 0.6% PMI, that's $200/month, or $2,400 a year going to the insurer with zero equity impact. On a $700,000 loan at 1% PMI, it's nearly $600/month.
The Four Flavors of PMI
- Borrower-Paid Monthly (BPMI). The default. You pay it each month as part of your mortgage payment. Removable once you hit 80% LTV.
- Single-Premium (Upfront). One lump payment at closing, often financed into the loan. Cheaper total if you stay in the home long-term; wasted money if you sell or refinance within a few years.
- Lender-Paid (LPMI). The lender "pays" the PMI and bakes it into a higher interest rate, typically 0.25 to 0.5% higher. The kicker: you can't get rid of it except by refinancing, because it's structural to the loan.
- Split-Premium. Part upfront, lower monthly. Rare, but occasionally useful.
The choice between BPMI and LPMI depends on how long you plan to hold the loan. Run the math on your actual timeline. If you'll refinance in three years anyway, LPMI's baked-in rate premium disappears at refi.
How to Get Rid of BPMI
Federal law (the Homeowners Protection Act of 1998) gives you three paths:
- Automatic termination at 78% LTV. When your principal balance reaches 78% of the original purchase price, the servicer must cancel PMI automatically, as long as you're current on payments. This is based on the amortization schedule, not current market value.
- Borrower-requested cancellation at 80% LTV. When the balance reaches 80% of original value, you can write to the servicer and request cancellation. They have to do it, again assuming you're current.
- Appreciation-based cancellation. Here's the one most homeowners miss: if your home's current value has risen enough that your balance is 80% or less of current value, you can request early cancellation. Servicers will require a new appraisal (~$500) and typically require two years of on-time payments for 80% threshold, five years for 75%.
In a hot market, the third path is how people kill PMI in year 2 or 3 instead of year 10. Run a comp check every year. If similar homes nearby are selling for significantly more than you paid, call your servicer.
FHA MIP: A Different Animal
FHA mortgage insurance is not governed by the Homeowners Protection Act, and the rules were tightened in 2013. For most FHA loans originated today with less than 10% down, MIP lasts the life of the loan. The only way to drop it is to refinance into a conventional loan once you have 20% equity.
This is why FHA is best thought of as a tool to get into the house, not a loan to hold for 30 years. Plan on refinancing out when you can, and factor the eventual refi costs into your overall financing decision.
Is PMI Worth Avoiding?
Not always. The "save for 20%" advice assumes a stable market. If home prices in your area are rising 5 to 8% a year, the appreciation you miss while saving will usually exceed what PMI costs you over the same period. And once you're in the home, PMI typically goes away within 5 to 10 years on a normal amortization schedule, faster if you're in an appreciating market.
Piggyback loans (an 80/10/10 structure: 80% first mortgage, 10% second lien, 10% down) are another way to avoid PMI, but second liens carry higher rates, and the all-in cost often lands close to what PMI would have been. Get real numbers from your lender on both structures before deciding.