What is PMI? Private Mortgage Insurance Explained
PMI is an extra cost that comes with having a smaller down payment. Learn what it is, why you need it, and how to remove it.
What is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is insurance that protects your mortgage lender if you stop making payments. It's required on conventional loans when your down payment is less than 20% of the home's value.
PMI doesn't protect you as the borrower—it protects the lender's investment. This allows lenders to offer loans to buyers who can't afford a large down payment.
When is PMI Required?
PMI is typically required when:
- Your down payment is less than 20%
- You have a conventional loan (not FHA, VA, or USDA)
- Your loan-to-value ratio (LTV) exceeds 80%
Government loans like FHA have their own insurance requirements (MIP), which work differently.
How Much Does PMI Cost?
PMI costs vary based on your credit score, loan type, and down payment. Typical costs include:
- Monthly PMI: 0.5% to 1% of your loan amount annually
- On a $300,000 loan: $125 to $250 per month
Borrowers with lower credit scores or smaller down payments typically pay higher PMI rates.
How to Remove PMI
Once you build enough equity, you can remove PMI:
- Automatic Removal: At 78% LTV, lenders must automatically remove PMI
- Request Removal: At 80% LTV, you can request removal
- Refinance: A new loan may eliminate PMI if you have enough equity
Contact your lender to request a PMI removal once you reach 80% equity.
Avoiding PMI
The best way to avoid PMI is to put down 20% or more. However, if that's not possible, consider:
- Piggyback Loans: Two loans totaling 80% to avoid PMI
- VA Loans: No PMI required for eligible veterans
- USDA Loans: No PMI, just a guarantee fee