Private Mortgage Insurance: What Is PMI and How Much Does It Cost?

Private mortgage insurance (PMI) is an insurance policy lenders require for conventional home loans when a borrower puts down less than 20% of the home’s price as a down payment. It’s purpose is to protect the lender, not the buyer, because the loan is a greater risk with a smaller down payment.

Paying PMI can help you purchase a home sooner, but it also adds a monthly cost that affects your budget. Knowing how PMI works helps you prepare for the financial impact.

PMI also isn’t permanent. As your equity grows, you may be able to remove it and lower your payment. In this article, we’ll share what PMI is, how it works, how much you might pay, and how to manage or reduce the cost over time.

Table of Contents

1. What is PMI?
2. How PMI works
3. How much PMI costs
4. The trade-offs of PMI
5. How to eliminate or avoid PMI
6. Factoring PMI into your homebuying plan

What is PMI?

Private mortgage insurance (PMI) protects the lender if a borrower stops making payments. It’s typically required when the down payment is below 20%. PMI makes it possible to buy a home sooner, even without a large savings cushion.

Lenders require PMI on most standard, non-government-backed mortgages, often called conventional loans. Because these loans don’t have any federal guarantee, lenders rely on PMI to manage the added risk that comes with a higher loan-to-value (LTV) ratio.

Government-backed loans follow different rules. For example, FHA loans require their own form of mortgage insurance because the FHA provides a guarantee to the lender. Borrowers with a small down payment on these loans pay FHA mortgage protection insurance (MPI) instead of PMI.

The key difference between PMI and MPI is who provides the protection. PMI is offered by private insurers for conventional loans. FHA mortgage protection insurance is part of a federal program with set costs and timelines.

How PMI works

PMI is added to your mortgage when the lender views the loan as higher risk because of a smaller down payment. The insurance protects the lender, not the borrower. You pay for it monthly as part of your mortgage bill.

Lenders generally require PMI when your LTV ratio is above 80%. As you build equity, the lender’s risk decreases. PMI is designed to end once enough equity is in place.

PMI can be removed once you reach 20% equity based on the original value. It must fall off automatically when you’ve reached a 78% LTV under federal guidelines. However, you also have the right to ask your lender to cancel the PMI when you’ve reached an 80% LTV. 

Here are some key points about PMI to keep in mind:

• PMI is generally required when the down payment is below 20%
• You can request removal once you’ve built 20% equity
• Lenders must cancel PMI automatically at 78% equity

To show how PMI works, consider a buyer who purchases a $300,000 home with 10% down and finances $270,000. If the home’s value quickly rises to $337,500, the owner will reach 20% equity and may request PMI removal. The lender will confirm the new value and decide if the loan qualifies.

How much PMI costs

PMI costs can vary widely depending on the loan and borrower profile. Annual premiums vary, but PMI could range from about 0.5% to as much as 6% of the loan amount annually, giving buyers a broad range to plan for. The PMI cost will appear on your loan estimate and closing disclosure.

Your down payment size and credit score play major roles in shaping the PMI rate. A smaller down payment increases your LTV ratio, which can lead to higher premiums. Stronger credit can help lower the cost.

Some mortgages require an initial PMI premium payment at closing, followed by monthly premiums. These monthly charges continue until the loan reaches 78% LTV, or 80% if you request removal and the lender approves it.

Private mortgage insurance can be paid as:

• A one-time upfront premium at closing
• Monthly premiums added to your mortgage payment
• Both an upfront premium at closing and monthly premium payments

PMI is calculated as a percentage of the original loan amount and divided into monthly payments. For example, if you borrow $300,000 at a 1% PMI rate, the annual premium is $3,000, or about $250 per month. Your lender can provide the exact percentage and may offer an estimate even before you apply.

Some lenders even share typical PMI ranges to help borrowers estimate costs. For instance, SoFi says that PMI often costs 0.5% to 1% of your loan annually, while Rocket Mortgage notes a broader range of about 0.2% to 2% each year. These examples can give you a sense of where your rate might fall.

You may find it helpful to use a tool like a mortgage calculator to estimate your base mortgage payment. Since PMI isn’t included in all mortgage calculators, you can calculate your mortgage payment first, then add the estimated PMI amount. 

Taking time to do this type of analysis can help you create a ballpark estimate when discussing options with your lender and evaluating the affordability of the mortgage.

The trade-offs of PMI

PMI can feel like an added burden, but it also allows buyers to enter the market sooner. Without it, many borrowers would need years to save a full 20% down payment. PMI helps bridge that gap so buyers can move forward earlier.

The trade-off is that PMI increases your monthly housing cost. Because the payment doesn’t build equity or reduce your loan balance, it’s an expense you must budget for carefully. Still, the cost may be worthwhile if home prices are rising.

PMI is neither inherently good nor bad. It’s a financial tool that helps buyers reach homeownership sooner, but it also adds a recurring cost. Understanding this balance helps you decide whether buying now or waiting makes more sense for your situation.

When clients are making smaller down payments on their homes, we guide them to see this as an extra cost. This should be a factor in purchasing a home and making monthly payments. If they can’t afford the usual minimum 20% down payment to avoid PMI, then we would advise them (based on cash flow and affordability) to put down extra toward principal. Over time, the opportunity to remove PMI will approach either from paying down the loan principal or appreciation in their home. 

How to eliminate or avoid PMI

You can remove PMI once you reach 20% equity and meet your lender’s requirements. It will also fall off automatically at 78% LTV. If your home value has increased, you may be able to request early removal.

You can avoid PMI by making a 20% down payment, choosing a loan program without PMI, or using a lender-paid PMI option, though that may increase your interest rate. Borrowers may also consider using gifts or other available funds to reach the needed equity.

Some areas even offer down payment assistance programs, including certain counties in Arizona and statewide programs in places like Iowa. These initiatives can help eligible buyers reduce their upfront costs and avoid PMI.

When PMI is in place, homeowners should proactively monitor their home equity via the loan-to-value (LTV) ratio and other factors, such as tracking your mortgage principal balance, monitoring local property values, and maintaining a stellar mortgage payment history.

Factoring PMI into your homebuying plan

PMI is one piece of the broader financing picture, so it helps to consider how it fits into your overall budget. Understanding when PMI can be removed allows you to plan for future savings. This perspective can help you compare mortgage options more confidently.

You can explore loan scenarios by running base payment estimates through a mortgage calculator and adding estimated PMI costs. Shopping around to compare mortgage lenders can also reveal differences in lender policies and PMI requirements. 

Some mortgage lenders may offer programs with reduced PMI or specific removal guidelines to consider. For instance, Navy Federal Credit Union doesn’t require its members to pay PMI at all, even if the down payment is less than 20%.

A thoughtful plan can make PMI feel more manageable. When you understand how PMI works, how much it may cost, and when it can be removed, you can approach homebuying with more confidence. That clarity can help you choose a mortgage that supports both your goals and your budget.