A clipboard of private mortgage insurance

Private Mortgage Insurance (PMI): Cost, Requirements and Removal

Buying a home with less than a 20% down payment is more common than many buyers realize. If you finance a home with a conventional loan and put down less than 20%, your lender will typically require Private Mortgage Insurance, commonly known as PMI.

Although PMI adds to your monthly mortgage payment, it may allow you to purchase a home sooner instead of waiting years to save a larger down payment. Understanding how PMI works, what it costs and when it can be removed can help you make a more informed financing decision.

What Is Private Mortgage Insurance?

Private Mortgage Insurance protects the mortgage lender—not the homeowner—if a borrower stops making payments and defaults on a conventional mortgage.

Because PMI reduces the lender’s financial risk, qualified homebuyers may be able to purchase a home with a conventional loan and a down payment as low as 3%, rather than waiting until they have saved 20%.

PMI does not provide direct insurance protection to the homeowner. Its primary benefit is making conventional financing available with a smaller down payment.

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When Is PMI Required?

For most conventional mortgages, PMI is required when the borrower makes a down payment of less than 20% of the home’s purchase price.

3% down: PMI is generally required.
5% down: PMI is generally required.
10% down: PMI is generally required.
15% down: PMI is generally required.
20% or more down: PMI is generally not required.

PMI applies specifically to conventional mortgages. Other loan programs use different forms of mortgage insurance or guarantee fees:

FHA loans require Mortgage Insurance Premium, commonly called MIP.
VA loans do not require monthly mortgage insurance, although a VA funding fee may apply.
USDA loans require an upfront guarantee fee and an annual fee.

How Much Does PMI Cost?

PMI pricing varies by borrower and loan. The cost may range from approximately 0.2% to 1.5% of the original loan amount annually, although actual premiums can fall outside that range.

As a general illustration, PMI may cost approximately $15 to $125 per month for every $100,000 borrowed. Your actual premium will depend on your mortgage insurance provider, loan structure and borrower profile.

Loan-to-Value Ratio

Your loan-to-value ratio, or LTV, compares your mortgage balance with the property’s value. A smaller down payment results in a higher LTV and generally increases the PMI premium.

5% down equals approximately 95% LTV.
10% down equals approximately 90% LTV.
15% down equals approximately 85% LTV.

Credit Score

Your credit score can significantly affect PMI pricing. Borrowers with stronger credit profiles generally receive lower premiums than borrowers with lower credit scores.

Loan and Property Details

Your loan amount, occupancy, mortgage term, property type and selected PMI structure may also affect your final premium.

Types of Private Mortgage Insurance

Mortgage lenders may offer more than one way to structure PMI. The right option depends on your cash available at closing, expected time in the home and long-term financing goals.

Borrower-Paid Mortgage Insurance

Borrower-paid mortgage insurance is the most common form of PMI. The premium is added to your monthly mortgage payment and paid to the insurer through your loan servicer.

Depending on the loan and property value, you may later request cancellation after reaching sufficient equity.

Lender-Paid Mortgage Insurance

With lender-paid mortgage insurance, the lender pays the mortgage insurance premium in exchange for a higher mortgage interest rate.

There is no separate monthly PMI charge, but the cost is reflected in the interest rate. Lender-paid mortgage insurance generally cannot be canceled without refinancing into a new mortgage.

Single-Premium Mortgage Insurance

Single-premium PMI allows you to pay the mortgage insurance cost as a lump sum at closing instead of adding it to your monthly payment.

This may reduce your monthly payment, but it increases the cash needed at closing. It may also provide less value if you sell or refinance shortly after purchasing the home.

How Do You Pay PMI?

The available payment structures vary by lender and loan. Two common approaches are monthly PMI and upfront PMI.

Monthly PMI

The premium is included in your monthly mortgage payment. This option spreads the cost over time and reduces the cash needed at closing.

Upfront PMI

The premium is paid at closing as a lump sum. This lowers your monthly mortgage payment but increases the amount of money needed to complete the purchase.

Before choosing upfront PMI, compare the cost with using those funds for a larger down payment. Increasing your down payment may reduce your PMI rate, shorten the period PMI is required or eliminate PMI altogether.

When Can PMI Be Removed?

One of the primary advantages of conventional PMI is that it is generally temporary. Depending on your mortgage and payment history, PMI may be removed in several ways.

Request PMI Cancellation at 80% LTV

You may be able to request PMI cancellation when your principal balance reaches 80% of the property’s original value, provided you meet your loan servicer’s payment-history, occupancy and property requirements.

Automatic PMI Termination at 78% LTV

Federal law generally requires automatic PMI termination on the scheduled date when the loan balance reaches 78% of the property’s original value, provided the mortgage is current.

Request Removal Based on Increased Property Value

If your home has appreciated or you have completed qualifying improvements, your servicer may allow you to request removal based on a new appraisal and your current loan-to-value ratio.

Refinance the Mortgage

Refinancing may eliminate PMI when the new loan amount is 80% or less of the home’s current appraised value. Before refinancing, compare the new interest rate, closing costs, monthly savings and estimated break-even period.

Already paying mortgage insurance?

You may have enough equity to remove PMI or refinance into a different loan structure. We can help you review the potential savings, estimated costs and available options.

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PMI cancellation requirements vary by loan servicer, payment history, property type, occupancy, loan seasoning and applicable law. Contact your loan servicer for the requirements that apply to your current mortgage.

FHA Mortgage Insurance vs. Conventional PMI

FHA loans do not use private mortgage insurance. Instead, they require an upfront and annual Mortgage Insurance Premium, commonly called MIP.

For FHA loans with an original down payment below 10%, annual MIP generally remains for the life of the loan. With an original down payment of at least 10%, annual MIP generally ends after 11 years.

Conventional PMI may be removed after the homeowner reaches sufficient equity and meets the loan servicer’s requirements.

Refinancing from an FHA loan into a conventional loan may eliminate monthly mortgage insurance when the homeowner has sufficient equity and qualifies for the new financing.

How Can You Avoid Paying PMI?

Depending on your eligibility, available funds and loan program, several strategies may help you avoid or eliminate PMI.

Make a 20% down payment. A conventional mortgage with at least 20% down generally does not require PMI.
Use an eligible VA loan. VA loans do not require monthly mortgage insurance, although a VA funding fee may apply.
Use eligible gift funds. Many mortgage programs permit gift funds from an acceptable donor for part or all of the down payment and closing costs.
Build equity and request removal. You may qualify after paying down your mortgage or benefiting from increased property value.
Refinance after building equity. A new conventional mortgage may not require PMI if the loan-to-value ratio is 80% or lower.

Is Paying PMI Worth It?

PMI is an additional housing expense, but avoiding it at all costs is not always the best financial decision. PMI may be worthwhile when it allows you to purchase a suitable home sooner rather than continue renting while saving a 20% down payment.

Buying with PMI may allow you to:

Purchase a home with a smaller down payment.
Begin building home equity sooner.
Retain more cash for reserves, repairs and moving expenses.
Benefit from potential property appreciation.
Avoid delaying a purchase while home prices or rent payments increase.

The best decision depends on the PMI cost, your current rent, available cash, expected time in the home, local property prices and overall financial goals.

Is PMI Tax Deductible?

The federal tax treatment of mortgage insurance premiums has changed multiple times. Eligibility can depend on the applicable tax year, current federal law, adjusted gross income and whether you itemize deductions.

Consult a qualified tax professional or review current IRS guidance before claiming a deduction for mortgage insurance premiums. Metropolitan Mortgage does not provide tax or legal advice.

The Bottom Line

Private Mortgage Insurance allows qualified borrowers to use a conventional loan without making a 20% down payment. While PMI increases the monthly mortgage payment, it is generally temporary and may be removed after the homeowner builds sufficient equity.

Before deciding how much to put down, compare the estimated PMI, monthly payment, closing costs, available cash reserves and long-term cost of each loan structure.

Compare Your Down-Payment and Mortgage Insurance Options

Metropolitan Mortgage can help you compare conventional, FHA, VA and USDA financing, estimate your potential mortgage insurance cost and explain how each option may affect your monthly payment and cash needed at closing.

Conventional financing with low-down-payment options
PMI and monthly payment estimates before you apply
FHA, VA, USDA and conventional loan comparisons
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All loans are subject to credit approval, underwriting guidelines and property requirements. This content is provided for general informational purposes and does not represent a commitment to lend.