What is PMI?
Private Mortgage Insurance (PMI) is a type of insurance that protects your lender - not you - if you stop making payments on your conventional mortgage. PMI is required when your down payment is less than 20% of the home's purchase price. Understanding PMI is crucial because it adds hundreds of dollars to your monthly payment and affects your total borrowing costs significantly.
Key Point
PMI protects the lender, not the borrower. You pay for insurance that covers the lender's loss if you default. However, PMI enables buyers with smaller down payments (3-5%) to qualify for conventional loans, making homeownership accessible sooner.
When is PMI Required?
PMI is required for conventional loans when your down payment is below 20%:
| Down Payment | PMI Required? | Notes |
|---|---|---|
| 3% (minimum for conventional) | Yes | First-time buyer programs |
| 5% | Yes | Common conventional minimum |
| 10% | Yes | Lower PMI rate than 5% down |
| 15% | Yes | Even lower PMI rate |
| 20%+ | No | No PMI required |
How Much Does PMI Cost?
PMI costs vary based on your credit score, down payment percentage, and loan type. Typical annual PMI rates range from 0.25% to 1% of the original loan amount:
PMI Cost Examples ($250,000 Loan)
| Credit Score | Down Payment | Annual PMI Rate | Monthly PMI |
|---|---|---|---|
| 760+ (Excellent) | 5% | 0.25% | $52 |
| 740-759 (Very Good) | 5% | 0.35% | $73 |
| 720-739 (Good) | 5% | 0.45% | $94 |
| 680-719 (Fair) | 5% | 0.60% | $125 |
| 620-679 (Minimum) | 5% | 0.90% | $188 |
| 680-719 (Fair) | 10% | 0.35% | $73 |
Higher credit scores and larger down payments significantly reduce PMI costs. A 680 credit score with 5% down pays $125/month; with 10% down, only $73/month. Improving your credit before buying can save $50-150/month on PMI.
Types of PMI
There are several PMI payment options, each with different cost structures:
Borrower-Paid Monthly PMI (Most Common)
Monthly payments added to your mortgage bill. No upfront cost. Cancelable when you reach 20% equity. Most borrowers choose this for flexibility and lower upfront costs.
Example: $250,000 loan at 0.5% = $104/month
Single-Premium PMI
Pay entire PMI cost upfront at closing (1-2% of loan). No monthly PMI payments. Lower total cost if you stay in the home long-term, but higher closing costs. Can be financed into the loan.
Example: $250,000 loan × 1.5% = $3,750 upfront (financed or paid)
Split-Premium PMI
Combination: smaller upfront payment + lower monthly payments. Reduces closing costs compared to single-premium while lowering monthly payments. Good middle-ground option.
Example: 0.5% upfront + 0.25% monthly = $1,250 + $52/month
Lender-Paid PMI (LPMI)
Lender pays PMI upfront; you get slightly higher interest rate instead. No monthly PMI, but the higher rate lasts for entire loan term. Cannot cancel. Better if staying long-term.
Example: 6.5% rate becomes 7.0% rate - higher rate forever
How to Remove PMI
Unlike FHA MIP which often lasts for the loan's entire term, conventional PMI can be removed:
- Automatic cancellation: Lender must cancel PMI when you reach 22% equity based on original property value. No action needed - happens automatically when your loan balance reaches 78% of original value.
- Request cancellation at 20%: You can request PMI removal once you reach 20% equity (80% LTV). You may need to pay for an appraisal ($300-500) to prove current home value.
- Make extra payments: Paying extra toward principal accelerates equity buildup. Even $100 extra per month can remove PMI 2-3 years sooner.
- Home appreciation: If your home value increases significantly, you may reach 20% equity sooner. Request cancellation with a new appraisal.
- Refinance: If your home has appreciated, refinancing into a new loan without PMI is an option. Calculate if refinancing costs (2-3% of loan) are worth the PMI savings.
Important Requirements
To request PMI cancellation, you must: have a good payment history (no 30-day late payments in past 12 months, no 60-day late in past 24 months), have no other liens on the property, and meet lender's specific equity requirements. Automatic cancellation doesn't require these checks.
PMI vs FHA MIP
The key difference between conventional PMI and FHA MIP is cancellation:
Conventional PMI
- Cancelable at 20% equity
- Automatic removal at 22% equity
- Lower costs for good credit
- No upfront premium (usually)
- Costs: $50-200/month typical
- Duration: Until 20-22% equity
FHA MIP
- Cannot be canceled (if <10% down)
- Lasts entire loan term
- Same cost regardless of credit
- 1.75% upfront premium required
- Costs: $187+/month + upfront
- Duration: 11 years (10%+ down) or life
On a $250,000 loan over 30 years: FHA MIP costs ~$78,000 total (if 3.5% down). Conventional PMI costs ~$12,000-15,000 (if removed after 7 years at 20% equity). The difference is $60,000+.
PMI Cost Reduction Strategies
- Improve credit score: 740+ score can halve PMI costs. Pay down debts, fix errors, wait if score is low.
- Save for larger down payment: 10% down has much lower PMI rate than 5%. 15% down even better.
- Consider lender-paid PMI: Higher rate but no monthly PMI. Calculate if total cost is lower for your timeframe.
- Make extra payments: Even small extra payments accelerate PMI removal, saving thousands.
- Watch appreciation: If home value rises, request PMI cancellation early with new appraisal.
Related Calculators
Summary
PMI adds $50-200/month to conventional mortgages with less than 20% down, but enables homeownership with smaller down payments. Unlike FHA MIP, conventional PMI is removable - automatically at 22% equity or by request at 20%. Improving your credit score and making extra principal payments can significantly reduce PMI costs and accelerate removal. Calculate your specific PMI costs with our mortgage calculator and compare conventional vs FHA options.