What Is Private Mortgage Insurance?
PMI is insurance that protects the lender when you put less than 20% down on a home. Learn how much it costs and how to remove it.
Definition
Private mortgage insurance (PMI) is insurance that protects the lender (not you) if you default on your mortgage. It is required on conventional loans when you make a down payment of less than 20%. PMI typically costs 0.5-1% of the total loan amount annually, added to your monthly mortgage payment. On a $300,000 loan, that is $125-$250 per month.
PMI exists because loans with less than 20% down are riskier for lenders -- borrowers with less equity are more likely to default. The insurance protects the lender's investment, not yours. You pay for it, but you receive no benefit from it. This is why eliminating PMI as soon as possible is a common financial goal for homeowners.
PMI is automatically removed when your loan-to-value (LTV) ratio reaches 78% (you have 22% equity) based on the original purchase price. You can also request removal at 80% LTV (20% equity). Some homeowners accelerate this by making extra principal payments or getting a new appraisal if their home has appreciated significantly.
Real-World Example
You buy a $400,000 home with 10% down ($40,000), taking a $360,000 mortgage. PMI at 0.7% costs $2,520 per year or $210 per month. Your total monthly payment is $2,100 (principal + interest) plus $210 (PMI) = $2,310. Once your loan balance drops to $320,000 (80% of the $400,000 purchase price), you can request PMI removal, saving $210/month. If your home has appreciated to $450,000, your LTV is even lower and you may qualify for removal sooner with a new appraisal.
Why It Matters
PMI costs homeowners thousands of dollars per year for insurance that only benefits the bank. Understanding how to minimize or eliminate PMI can save significant money. Strategies include: making a 20% down payment (avoids PMI entirely), making extra principal payments to reach 80% LTV faster, refinancing if your home has appreciated (the new appraisal may show enough equity), or choosing an FHA loan (which has its own mortgage insurance with different rules).
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Frequently Asked Questions
How much does PMI cost?
Typically 0.5-1% of the loan amount per year, depending on your credit score, down payment, and loan type. On a $300,000 loan, expect $125-$250/month. Better credit scores get lower PMI rates.
How do I get rid of PMI?
PMI is automatically canceled at 78% LTV (based on original purchase price). You can request removal at 80% LTV. You can also refinance if your home has appreciated enough to show 20%+ equity, or make extra principal payments to reach the threshold faster.
Is FHA mortgage insurance the same as PMI?
Similar but different. FHA mortgage insurance premium (MIP) is required on all FHA loans regardless of down payment and currently cannot be removed unless you refinance into a conventional loan. PMI on conventional loans can be removed at 80% LTV.
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