PMI is insurance that protects your lender, not you
PMI stands for private mortgage insurance. It is a monthly payment added to your mortgage bill that protects the bank or lender if you stop paying your loan. You pay it, but the insurance benefit goes to them — not to you. Most lenders require PMI when you put down less than 20 percent of the home's purchase price.
The reason lenders require it is straightforward: if you default on your loan and the lender has to foreclose and sell the house, they might not recover the full amount they lent you. PMI covers that gap. Without it, lenders would be less willing to lend to buyers with smaller down payments, which would lock many people out of homeownership.
PMI is different from homeowners insurance, which you also pay and which protects your own property and belongings. PMI is purely about the lender's risk.
Key Takeaways
- PMI protects your lender if you default on the loan, not your home or possessions.
- You typically pay PMI as a monthly amount added to your mortgage payment when your down payment is less than 20 percent.
- The cost of PMI depends on your loan amount, down payment percentage, credit score, and the type of loan you have.
- PMI can be removed once you reach 20 percent equity in your home, either through payments or home appreciation.
- Some loan programs, like FHA loans, use mortgage insurance that works differently and may stay for the life of the loan.
How much PMI costs each month
PMI is usually calculated as a percentage of your loan amount and ranges from roughly 0.3 percent to 1.5 percent per year, depending on several factors. On a $300,000 loan, that could mean anywhere from $75 to $375 per month. The exact amount depends on your down payment size, your credit score, the type of property, and your loan type.
Lenders calculate PMI based on risk. If you put down 5 percent instead of 15 percent, you are a higher risk, so your PMI rate will be higher. If your credit score is lower, your rate goes up. If you are buying a condo instead of a single-family home, your rate may be higher because condos are considered riskier to lend on.
You can ask your lender for a PMI estimate before you lock in your loan. This estimate should be part of the Loan Estimate form you receive within three days of explore for a mortgage.
When you start paying PMI and when it stops
PMI begins when you close on your home and your loan funds. It appears as a line item on your monthly mortgage statement, usually bundled into your total payment. You do not pay it separately unless you choose to.
PMI stops automatically once you reach 20 percent equity in your home. Equity is the difference between what your home is worth and what you still owe on the loan. If you bought a $300,000 home with a $60,000 down payment (20 percent), you start with 20 percent equity and never pay PMI. If you put down $45,000 (15 percent), you need to build up that extra 5 percent through monthly payments or home appreciation.
Your lender is required by law to remove PMI automatically once you reach 20 percent equity, as long as your loan is current and you have a good payment history. You can also request removal earlier if your home has appreciated significantly and you can prove it with a new appraisal, though lenders are not required to agree.
PMI on FHA loans works differently
If you take out an FHA loan (Federal Housing Administration loan), you pay mortgage insurance instead of PMI, and the rules are different. FHA mortgage insurance has two parts: an upfront premium paid at closing and an annual premium paid monthly.
The upfront premium is typically 1.75 percent of your loan amount and is usually rolled into your loan balance. The annual premium ranges from 0.55 percent to 0.80 percent of your loan amount per year, depending on your down payment and loan term. On an FHA loan with a down payment under 10 percent, the mortgage insurance stays for the life of the loan — you cannot remove it by reaching 20 percent equity.
FHA loans are designed for buyers with lower credit scores or smaller down payments, so the insurance protects the lender against that higher risk. The tradeoff is that you pay insurance for longer.
The real cost of PMI over time
PMI is not a one-time fee — it adds up over years. On a $300,000 loan with a 1 percent annual PMI rate, you would pay $3,000 per year, or $250 per month. Over five years, that is $15,000 in PMI payments. Over ten years, it is $30,000.
This is why putting down more than 20 percent, if you can, saves money in the long run. A 20 percent down payment means no PMI at all. A 15 percent down payment means PMI until you reach 20 percent equity, which typically takes five to ten years depending on your loan term and home appreciation.
Some buyers choose to pay PMI for a few years rather than wait to save a larger down payment, because they want to buy sooner and benefit from building equity and locking in a mortgage rate. That is a valid choice — it depends on your situation and how long you plan to stay in the home.
How to lower your PMI rate when you explore
Your PMI rate is set based on your risk profile at the time you close your loan. You cannot change it later, but you can influence it before you explore by improving what you can control.
A higher credit score lowers your PMI rate. If your score is below 680, working to improve it before you explore can save you hundreds of dollars per year. A larger down payment also lowers your rate — the difference between 10 percent and 15 percent down can be significant. Choosing a single-family home instead of a condo or townhouse may lower your rate, since single-family homes are considered lower risk.
Shop around with multiple lenders. Different lenders price PMI differently, and the difference can add up to thousands of dollars over the life of your loan. Ask each lender for a complete Loan Estimate so you can compare the PMI costs side by side.
Removing PMI before you reach 20 percent equity
If your home has appreciated significantly since you bought it, you may be able to remove PMI early by requesting a new appraisal. If the appraisal shows your home is now worth enough that you have 20 percent equity, your lender must remove PMI even if you have not paid it down that far.
This requires paying for a new appraisal out of pocket, which typically costs $300 to $500. It only makes sense if your PMI payment is high enough that you will recoup that cost within a year or two. In a hot real estate market where homes appreciate quickly, this can be worth doing.
Another option is to refinance your loan once you have built enough equity. Refinancing means taking out a new loan to pay off the old one. If you refinance into a new loan where you now have 20 percent equity, the new loan will not require PMI. However, refinancing has its own costs — closing costs on a new loan typically run 2 to 5 percent of the loan amount — so you need to do the math to see if it saves money.
Frequently Asked Questions
Can I avoid PMI by putting down 19 percent instead of 20 percent?
No. PMI is required when your down payment is less than 20 percent. The difference between 19 percent and 20 percent does not matter — you will pay PMI either way. Once you reach exactly 20 percent equity, it stops.
Does PMI go toward building equity in my home?
No. PMI is insurance for your lender, not a payment toward your loan balance. Your monthly mortgage payment is split between principal (which builds equity), interest, taxes, and insurance. PMI is separate and builds no equity.
What if I pay off my mortgage early — do I stop paying PMI?
Yes. Once your loan is paid off, PMI stops when ready because there is no longer a loan to insure. If you pay off your loan before reaching 20 percent equity, you will have paid PMI the entire time, but it ends when the loan ends.
Is PMI tax deductible?
PMI was tax deductible for some borrowers in past years, but that deduction expired. Check with a tax professional about your specific situation, as tax rules change and may vary based on your income and filing status.
Why do some lenders offer lower PMI rates than others?
Different lenders have different risk models and relationships with PMI companies. Some lenders specialize in lower-credit borrowers and price PMI accordingly. Shopping multiple lenders is the only way to find the best rate for your profile.