Insurance
Understanding PMI: Private Mortgage Insurance Explained
Everything you need to know about PMI, including when it's required and how to avoid or remove it.
Insurance Specialist
December 30, 2023
6 min read
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What is PMI?
Private Mortgage Insurance (PMI) is insurance that protects the lender if you default on your loan. It's typically required when you put less than 20% down on a conventional mortgage.
When PMI is Required
- Conventional Loans: Less than 20% down payment
- FHA Loans: Mortgage Insurance Premium (MIP) instead of PMI
- VA Loans: Funding fee instead of PMI
- USDA Loans: Guarantee fee instead of PMI
How PMI Works
PMI is calculated as a percentage of your loan amount and added to your monthly payment:
- Typical Cost: 0.5-1% of loan amount annually
- Example: $300,000 loan × 0.5% = $1,500/year = $125/month
- Payment Method: Usually included in monthly payment
PMI vs. MIP (FHA Loans)
| Feature | PMI (Conventional) | MIP (FHA) |
|---|---|---|
| Upfront Cost | Usually none | 1.75% of loan amount |
| Annual Cost | 0.5-1% | 0.45-1.05% |
| Removal | At 20% equity | Usually for life of loan |
How to Avoid PMI
- 20% Down Payment: Most straightforward way
- Piggyback Loans: 80/10/10 or 80/15/5 structure
- Lender-Paid PMI: Higher interest rate instead
- VA Loans: No PMI for eligible veterans
- USDA Loans: No PMI in rural areas
Removing PMI
Automatic Removal
PMI is automatically removed when you reach 22% equity based on the original purchase price.
Requested Removal
You can request PMI removal when you reach 20% equity if:
- Your loan is in good standing
- You have a good payment history
- You can prove current home value
Home Value Appreciation
If your home has increased in value, you might be able to remove PMI early by getting a new appraisal.
Calculating PMI Impact
Example: $300,000 home with 10% down ($30,000)
- Loan amount: $270,000
- PMI cost: $270,000 × 0.5% = $1,350/year
- Monthly PMI: $112.50
- Total additional cost: $1,350/year
PMI vs. Higher Down Payment
Consider the trade-offs:
- PMI Option: Lower upfront cost, higher monthly payment
- 20% Down: Higher upfront cost, lower monthly payment
- Break-even: Calculate when PMI costs exceed down payment savings
Tips for Managing PMI
- Monitor your loan balance and home value
- Request PMI removal as soon as eligible
- Consider extra payments to reach 20% faster
- Refinance when rates are low and you have 20% equity
- Keep records of home improvements for value increases
Use our mortgage calculator to see how PMI affects your monthly payment and explore different down payment scenarios.
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