What Is Private Mortgage Insurance (PMI) And How Does It Work?

There’s so much to think about when buying a home. You want to choose the right neighborhood, get the lowest mortgage rate possible and find a property with all your desired amenities. But before you get too wrapped up in the details of homebuying, take a step back and consider how private mortgage insurance might fit into the equation. It’s not exactly cheap, after all.

What Is PMI?

Private mortgage insurance, or PMI, is a type of mortgage insurance coverage required by some lenders when the mortgage borrower doesn’t make a large enough down payment. This mortgage insurance doesn’t actually protect you in any way. Instead, it’s there to protect the lender from a major financial loss in case you’re unable to repay your loan. If the property goes into a short sale or foreclosure auction and there isn’t enough equity built up to cover the loss, PMI serves as a way to fill the gap.

Who Needs PMI Insurance, and Can You Avoid It?

Conventional mortgage lenders require PMI when the down payment on a home loan is less than 20% of the purchase price, or when you refinance with less than 20% equity. Some government-backed loans, such as Federal Housing Administration (FHA) loans, also require mortgage insurance, but it works a bit differently.

Of course, saving up 20% of your home’s value is easier said than done. The median sale price for an existing home in the U.S. was $392,800 in 2022, according to the National Association of Realtors. That means you need to save at least $78,560 to avoid PMI. Depending on your personal financial situation, location and lifestyle, that may or may not be realistic.

That’s why paying PMI isn’t necessarily a bad thing if you can easily afford it. But if PMI would strain your budget or cause you to spend significantly more on a home than you’d like, it’s a good idea to avoid it.

How Much Is PMI?

The cost of private mortgage insurance ranges depending on the particular lender and how much money you actually put down on the loan. PMI is calculated as a percentage of your total loan amount and generally ranges between 0.58% and 1.86%. The larger your loan, the more PMI you will end up paying.

The cost of PMI is also influenced by your loan-to-value ratio (LTV). This represents how much you’re borrowing in comparison to the total value of the property. The more you put down, the less you need to borrow, which gives you a higher LTV. For example, if you put 20% down on a home, your LTV should then be 80%. A smaller down payment—and thus, lower LTV—likely will require you to pay PMI until you reach that 80% mark. The lower your LTV, the higher the risk for the lender, which is why the cost of PMI often increases as your LTV decreases.

Finally, your credit score also can influence the cost of PMI. The higher your score, the less risk you represent to lenders, so it may be possible to qualify for lower PMI with good credit.
Let’s look at an example of how much PMI can cost:

Say you purchased a home for $500,000 and only put 10% down ($50,000). That means you borrowed a total of $450,000. Your lender charges you PMI of 1%, for an annual premium of $4,500 or $375 per month.

The good news? PMI is currently tax deductible. Previously, you could only deduct PMI through 2017. However, thanks to the Further Consolidated Appropriations Act of 2020, Congress extended the deduction through Dec. 31, 2020. That means you can deduct PMI for tax years 2019 and 2020, as well as retroactively for 2018.

Mortgage Insurance vs. Homeowners Insurance

Mortgage insurance is a payment you have to make when you put down less than 20% on a home loan. Homeowners insurance, on the other hand, is coverage you’re required to carry throughout your mortgage term—and it’s a good idea to have it even after you’re mortgage free.

The cost of homeowners insurance depends on your home’s value and location, the property’s claims history, the level of coverage you buy, the deductible you choose and more. Homeowners insurance protects you—the homeowner—but it also indirectly protects the lender because your home is the collateral for your mortgage.

	Mortgage Insurance	Homeowners Insurance
When Is It Required?	Usually required with a down payment less than 20%	Always required on mortgaged property; optional for free-and-clear homeowners but highly recommended
Who Does It Protect?	Protects the lender	Protects the homeowner’s investment and the lender’s collateral
Who Does It Pay?	Pays the lender if you default on your mortgage	Pays the homeowner to repair or rebuild after a covered loss
How Do You Pay It?	Can be paid up front, monthly or financed	Can be paid annually or in monthly installments as part of your mortgage payment

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How Do You Pay PMI?

Your lender will arrange PMI through its own network of insurance providers. The terms of the plan, including cost and length of time you’re required to pay it, will be provided to you at closing.

You can choose to pay the premium up-front as part of your closing costs, and then annually until you’re no longer required to pay it. Alternatively, you can roll the premium into your loan and make monthly payments on top of your regular loan payments. Keep in mind that if you split up the payments, however, you’ll pay interest on them, too. This can cause PMI to be much more expensive than you realize.

How Do You Get Rid of PMI?

Fortunately, there are a few ways to eventually get rid of PMI if you’re required to pay it now. The first is to consistently make your payments until you have 20% equity in your home—or an LTV of 80%—at which point you can reach out to your loan servicer and request to cancel it. If you don’t reach out, you’ll have to wait a little longer before it’s canceled automatically.

“A mortgage servicer is required to automatically cancel PMI when the [LTV] reaches 78% based on the terms of your loan when it originated,” said Tyler Warrick, strategic financing advisor at Real Estate Bees and a mortgage broker serving clients in Arizona, California and Texas.

How To Get Rid of PMI Early

You may no longer need to pay PMI if your home value increases. In this situation, your LTV might reach 80% ahead of schedule. Contact your lender to ask about reappraising your home and canceling your PMI. You’ll be responsible for the appraisal fee (typically a few hundred dollars).

“Keep in mind, your interpretation of your home’s value may be different from an appraiser’s opinion,” Warrick said. “They will base this off of recent sales and comparable properties.”

Finally, if your cash flow has increased, making extra payments toward your loan principal can also help you reach an LTV of 80% sooner.

Though you probably love the thought of getting rid of PMI as soon as possible, crunch the numbers first. Make sure that paying extra toward your mortgage is a better financial move than using the funds for other purposes, such as saving for retirement or paying off higher-interest debt.

Is Private Mortgage Insurance Worth It?

If the idea of paying private mortgage insurance gives you pause, it should. PMI is an avoidable extra cost associated with buying a home.

That said, sometimes paying PMI is the right move; it can help you get into a home that would otherwise be out of reach. So before you make the decision to take out a home loan that includes PMI, do your research to ensure you understand what it is, if you need it, and how much it costs.

Frequently Asked Questions (FAQs)