What Is PMI and How Can I Avoid It?
Private Mortgage Insurance (PMI) is a monthly premium lenders require when your down payment is below 20% of the purchase price on a conventional loan. It protects the lender if you default, not you. PMI typically costs 0.3% to 1.5% of the original loan amount per year, split into monthly payments. You can avoid PMI by putting 20% down, using a piggyback loan, choosing a VA loan, opting for lender-paid PMI, or buying out the premium upfront.
Key facts
| Down payment | Loan amount | PMI rate | Monthly PMI |
|---|---|---|---|
| 3% | $388,000 | 0.8% | $259 |
| 5% | $380,000 | 0.6% | $190 |
| 10% | $360,000 | 0.4% | $120 |
| 15% | $340,000 | 0.3% | $85 |
| 20% | $320,000 | None | $0 |
What is PMI and why do lenders require it?
Private Mortgage Insurance, or PMI, is an insurance policy that protects the lender if you stop making payments on your loan. It does not protect you, your home, or your equity. It is strictly for the lender's benefit.
Lenders require PMI whenever the loan-to-value ratio exceeds 80%, which happens when you put down less than 20%. The smaller your down payment, the higher the lender's risk. PMI offsets that risk and makes it possible to buy a home with as little as 3% down on a conventional loan.
How much does PMI cost per month?
PMI premiums depend on your down payment size, credit score, loan type, and debt-to-income ratio. The most common range is 0.3% to 1.5% of the original loan amount per year. On a $400,000 loan, that translates to roughly $100 to $500 per month.
Borrowers with credit scores above 740 and down payments near 15% get the lowest rates. Borrowers with scores below 680 and down payments under 5% pay the highest rates. Your loan officer can quote the exact premium after reviewing your credit and loan structure.
| Credit score | 3% down | 5% down | 10% down | 15% down |
|---|---|---|---|---|
| 760+ | 0.30% - 0.50% | 0.25% - 0.40% | 0.18% - 0.30% | 0.15% - 0.25% |
| 740-759 | 0.40% - 0.60% | 0.35% - 0.50% | 0.25% - 0.38% | 0.20% - 0.32% |
| 720-739 | 0.55% - 0.80% | 0.45% - 0.65% | 0.32% - 0.48% | 0.25% - 0.40% |
| 700-719 | 0.70% - 1.00% | 0.55% - 0.80% | 0.40% - 0.60% | 0.32% - 0.50% |
| 680-699 | 0.90% - 1.30% | 0.70% - 1.00% | 0.50% - 0.75% | 0.40% - 0.62% |
| 660-679 | 1.10% - 1.50% | 0.90% - 1.25% | 0.65% - 0.95% | 0.50% - 0.78% |
These are illustrative ranges. Your actual PMI rate is set by the mortgage insurance company and can vary by state, property type, and loan term. Always request a written Loan Estimate that shows the exact PMI premium before you commit to a loan.
When does PMI go away automatically?
Under the federal Homeowners Protection Act, lenders must automatically cancel PMI once your principal balance reaches 78% of the original home value, assuming you are current on payments and the loan is in good standing. This typically happens through normal amortization after 5 to 9 years, depending on your down payment and loan term.
You can also request cancellation once your balance reaches 80% of the original value, but the lender may require a new appraisal to confirm the home has not lost value. If your home has appreciated significantly, you may be able to remove PMI even earlier based on the current market value rather than the original purchase price.
How can you avoid PMI?
There are five common strategies to avoid PMI entirely.
- Put 20% down. This is the simplest way to eliminate PMI. On a $400,000 home, that means an $80,000 down payment.
- Use a piggyback loan. Also called an 80-10-10 or 80-15-5, this structure uses a first mortgage at 80% LTV and a second mortgage or home equity line for the remainder. The first mortgage avoids PMI because it stays at 80%.
- Choose a VA loan. VA loans do not require PMI regardless of down payment size. The funding fee replaces PMI and is typically lower over the life of the loan.
- Opt for lender-paid PMI (LPMI). The lender pays the PMI premium upfront in exchange for a slightly higher interest rate. Your monthly payment may be lower than borrower-paid PMI, but the higher rate lasts for the life of the loan.
- Buy out the PMI with a single upfront premium. Some borrowers pay the entire PMI cost at closing as a lump sum. This eliminates the monthly charge but requires more cash upfront.
Each strategy has tradeoffs. A piggyback loan adds a second monthly payment. LPMI raises your rate permanently. The right choice depends on how long you plan to stay in the home, your available cash, and your comfort with multiple loan payments.
What is lender-paid PMI and how does it work?
Lender-paid PMI, or LPMI, is an arrangement where the lender pays the mortgage insurance premium on your behalf. In exchange, you accept a higher interest rate, typically 0.25% to 0.50% above the standard rate.
LPMI can make sense if you plan to stay in the home for a short period, typically under 5 to 7 years. The monthly savings from avoiding a separate PMI charge may offset the higher rate over that timeframe. If you plan to stay longer, borrower-paid PMI is usually cheaper because the PMI drops off once you reach 78% LTV, while the higher rate from LPMI never adjusts.
Can you get rid of PMI early?
Yes. Even before automatic cancellation at 78% LTV, you have two paths to remove PMI early.
- Request cancellation at 80% LTV. Contact your lender once your balance reaches 80% of the original value. You may need to pay for a new appraisal to confirm current value, and the lender may require proof that the property has not declined in value.
- Request cancellation based on current market appreciation. If your home has increased in value significantly, your equity may have grown past 20% even though your loan balance has not dropped much. Lenders typically require an appraisal and 2 years of payment history before granting this request.
Not all lenders handle early PMI removal the same way. Some require a formal written request, a new appraisal, and a review of your payment history. Others are more streamlined. Contact your loan servicer directly to learn their specific process and any fees involved.
Do FHA loans have PMI?
FHA loans do not have PMI, but they do have mortgage insurance that works similarly. FHA borrowers pay two forms of mortgage insurance: an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, and an annual mortgage insurance premium (MIP) that is paid monthly.
The key difference is that FHA mortgage insurance typically cannot be removed. For loans with a down payment below 10%, MIP lasts for the entire loan term. For down payments of 10% or more, MIP can be removed after 11 years. This makes FHA loans more expensive over the long term compared to conventional loans with borrower-paid PMI, which can be removed once equity reaches 20%.
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Frequently asked
What is PMI on a mortgage?
PMI stands for Private Mortgage Insurance. It is a monthly insurance premium lenders require on conventional loans when your down payment is below 20% of the home's purchase price. PMI protects the lender, not the borrower, and is typically removed automatically once your loan balance reaches 78% of the original home value.
How much is PMI per month?
PMI typically costs 0.3% to 1.5% of your original loan amount per year, divided into monthly payments. On a $400,000 loan with 5% down and good credit, expect roughly $150 to $250 per month. Borrowers with lower credit scores or smaller down payments pay more.
Can you avoid PMI without putting 20% down?
Yes. You can avoid PMI with a piggyback loan structure, a VA loan, lender-paid PMI, or a single upfront premium buyout. Each option has tradeoffs. A piggyback adds a second loan payment. Lender-paid PMI raises your interest rate permanently. The best choice depends on your cash, credit, and how long you plan to keep the home.
When does PMI go away?
On conventional loans, PMI is automatically removed when your principal balance reaches 78% of the original home value, which usually takes 5 to 9 years with normal payments. You can also request cancellation at 80% LTV or if home appreciation has pushed your equity above 20%, though the lender may require a new appraisal.
Does PMI go away on FHA loans?
FHA loans do not have PMI, but they have Mortgage Insurance Premium (MIP). For down payments below 10%, MIP lasts for the life of the loan. For down payments of 10% or more, MIP can be removed after 11 years. This is a major reason some borrowers refinance from FHA to conventional once they reach 20% equity.
Is lender-paid PMI better than borrower-paid PMI?
Lender-paid PMI can be better if you plan to sell or refinance within 5 to 7 years, because the slightly higher rate may cost less than monthly PMI over that period. If you plan to stay longer, borrower-paid PMI is usually cheaper because it drops off once you reach 78% LTV, while the higher rate from LPMI never adjusts.
Can you deduct PMI on your taxes?
PMI deductibility changes with tax law. In some years Congress has allowed PMI to be deducted as mortgage interest, subject to income limits. In other years the deduction has expired. Check current IRS guidance or consult a tax professional for the year you are filing.
This article is for informational purposes only and does not constitute a commitment to lend. PMI rates, cancellation rules, and program requirements vary by lender, mortgage insurance provider, and state. Encompass Lending Group, LP NMLS #292897. Equal Housing Opportunity.
