What Is PMI? Private Mortgage Insurance, Explained
PMI — private mortgage insurance — is one of the most misunderstood costs of buying a home. Some buyers are blindsided by it; others avoid it unnecessarily by making a larger down payment than they need to. This guide explains what it is, what it costs, when it's actually required, and how to eliminate it.
What Is PMI?
PMI is insurance that protects the lender — not the borrower — if the borrower defaults on the loan. Despite paying for it, the buyer has no direct benefit from the policy.
Lenders require PMI when the borrower puts down less than 20% on a conventional loan. The rationale: loans with less equity have a statistically higher default rate, so the lender offsets the risk by requiring insurance coverage.
PMI is specific to conventional loans. FHA loans have their own version — called Mortgage Insurance Premium (MIP) — which works differently and costs more in most scenarios.
How Much Does PMI Cost?
PMI typically costs 0.2% to 2% of the original loan amount per year, divided into monthly payments added to your mortgage.
The exact rate depends on: loan-to-value ratio (lower LTV = lower PMI), credit score (higher score = lower PMI), loan term, and the specific PMI provider.
Example: On a $350,000 loan with 5% down and a 720 credit score, PMI might be ~0.6% annually = $2,100/year = $175/month added to your payment.
PMI rates improve significantly as your down payment increases from 5% toward 20%.
PMI vs. FHA MIP — Key Differences
This comparison matters because the right loan choice for borderline borrowers often hinges on it:
PMI (conventional): Cancellable once you reach 20% equity. Rate improves with better credit. Not required at all with 20%+ down.
FHA MIP: Required regardless of down payment. For loans originated since 2013 with less than 10% down, MIP lasts for the life of the loan — the only exit is refinancing into a conventional loan.
For a borrower with a 680 credit score and 5% down: FHA MIP will likely be more expensive long-term because it doesn't cancel. A conventional loan with PMI may be cheaper within 5–7 years even if the initial rate is slightly higher.
4 Ways to Get Rid of PMI
1. Wait for automatic cancellation: Federal law (the Homeowners Protection Act) requires lenders to automatically cancel PMI when your loan balance reaches 78% of the original purchase price — based on the original amortization schedule. You don't have to do anything.
2. Request cancellation at 80% LTV: Once your balance reaches 80% of the original purchase price (not current market value), you can request cancellation in writing. The lender must comply if you're current on payments and meet lender requirements.
3. Reappraisal based on appreciation: If your home has appreciated significantly, you may be able to request a new appraisal and cancel PMI based on the current LTV. Most lenders require being at least 2 years into the loan and may charge an appraisal fee.
4. Refinance into a conventional loan with 20%+ equity: Refinancing eliminates the old loan entirely. If your current value supports a new loan at 80% LTV or below, the new loan will have no PMI.
Common Questions
Is PMI tax-deductible?
The PMI tax deduction expired and has had an inconsistent history in Congress. Check current tax law or consult a tax advisor for the status in the current tax year. Mortgage interest deductions are separate and generally available if you itemize deductions.
Can I pay PMI upfront instead of monthly?
Yes — some lenders offer single-premium PMI, where you pay the full PMI cost at closing in exchange for no monthly PMI payment. It can make sense if you have closing cost assistance from the seller but expect to keep the loan long-term. Ask your loan officer to compare both options.
Does PMI protect me if I lose my job?
No. PMI protects the lender, not the borrower. It covers the lender's loss if you default and the foreclosure sale doesn't recover the full loan balance. It provides you no benefit or coverage for job loss, disability, or death.
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