How Much Is PMI and How Can You Avoid It?

Private Mortgage Insurance (PMI) is required by lenders for conventional mortgage loans when a borrower makes a down payment of less than 20% of the home’s purchase price. This insurance protects the lender, not the borrower, against financial losses if the borrower defaults on the loan. While PMI adds to the monthly housing expense, it enables individuals to qualify for a conventional mortgage without a substantial upfront down payment, making homeownership more accessible.

Determining Your PMI Cost

The cost of PMI varies based on several factors, calculated as an annual percentage of the original loan amount and paid monthly. Annual PMI costs typically range from 0.46% to 1.5% of the original loan amount. For instance, a $300,000 loan might incur annual PMI costs between $1,380 and $4,500, translating to a monthly payment between $115 and $375.

A primary factor influencing the PMI rate is the loan-to-value (LTV) ratio, which compares the loan amount to the home’s value. A higher LTV, resulting from a smaller down payment, indicates greater risk for the lender and therefore leads to a higher PMI premium. Similarly, a borrower’s credit score significantly impacts the cost, with higher credit scores generally resulting in lower PMI rates as these borrowers are perceived as less risky. The type of loan can also play a role; for example, adjustable-rate mortgages may have higher PMI due to increased risk compared to fixed-rate loans.

PMI is distinct from the Mortgage Insurance Premium (MIP) associated with Federal Housing Administration (FHA) loans, which has its own structure. Lender-specific rates also contribute to variations in PMI costs, as different lenders may have slightly different pricing models. Beyond monthly payments, some lenders offer single-premium PMI, where the entire cost is paid as a one-time lump sum at closing, or it can be rolled into the loan. While this eliminates monthly PMI payments, it increases closing costs or the overall loan amount, and the upfront payment may not be refundable if the home is sold or refinanced soon after.

Removing PMI from Your Mortgage

Once PMI is in place, there are established methods for its removal, often governed by federal law. The Homeowners Protection Act of 1998 (HPA) outlines specific conditions for both automatic termination and borrower-initiated cancellation of PMI on conventional loans. This act applies to privately insured first mortgages on single-family primary residences.

Automatic termination of PMI occurs when the loan balance is scheduled to reach 78% of the original home value, based on the initial amortization schedule. This termination happens automatically on the first day of the month after the 78% threshold is met, provided the borrower is current on their mortgage payments. Additionally, if PMI has not been canceled earlier, it must be terminated by the midpoint of the loan’s amortization period, regardless of the loan balance, again assuming the loan is current.

Borrowers can also proactively request PMI cancellation once their loan balance reaches 80% of the original home value. To initiate this, the borrower must submit a written request to the loan servicer and maintain a good payment history (no 30-day late payments in the past year or 60-day late payments in the past two years). If the home’s value has increased significantly due to market appreciation or improvements, an appraisal may be required to confirm the current loan-to-value ratio. Another common strategy for removing PMI is refinancing the mortgage into a new loan with at least 20% equity, which inherently eliminates the need for PMI.

Strategies to Avoid PMI

Several strategies can help borrowers avoid paying PMI from the outset of their mortgage. The most direct method is making a down payment of at least 20% of the home’s purchase price on a conventional loan. This larger down payment immediately reduces the loan-to-value (LTV) ratio to 80% or less, which is the threshold at which PMI is typically not required.

For those unable to make a full 20% down payment, “piggyback” loans offer an alternative. This involves taking out a first mortgage for 80% of the home’s value, combined with a second mortgage or home equity line of credit (HELOC) for a portion of the remaining amount, such as 10% or 15%, with the borrower contributing the rest as a down payment (e.g., an 80/10/10 or 80/15/5 structure). This arrangement allows the primary mortgage to remain at an 80% LTV, thereby bypassing the PMI requirement.

Lender-Paid Mortgage Insurance (LPMI) is another option where the lender covers the PMI cost. In exchange for this, the borrower typically agrees to a slightly higher interest rate on the mortgage for the life of the loan. While LPMI eliminates a separate monthly PMI payment, the cost is embedded in the interest rate, potentially increasing the total interest paid over the loan term.

Finally, certain loan programs, such as VA loans for eligible veterans and service members, do not require PMI. Instead of PMI, VA loans include a one-time funding fee, which can be financed into the loan amount. This fee is more affordable than ongoing PMI payments and can be waived for disabled veterans.