Private mortgage insurance (PMI) is a type of insurance required on many conventional mortgages when the borrower's down payment is below a certain threshold, typically 20% of the home's purchase price. PMI protects the lender — not the borrower — against financial loss if the loan defaults, and understanding how it's calculated, paid, and eventually removed is an important part of budgeting for a mortgage with a smaller down payment.
Why PMI Exists
From a lender's perspective, a smaller down payment means a higher loan-to-value (LTV) ratio and therefore more risk if the borrower defaults and the home needs to be sold to recover the loan balance. PMI shifts some of that risk to an insurance company, which allows lenders to approve loans with lower down payments than they might otherwise be willing to offer. Without PMI, most lenders would likely require a full 20% down payment on conventional loans, which would put homeownership out of reach for many buyers.
How PMI Costs Are Calculated
PMI is typically calculated as a percentage of the loan amount per year, commonly ranging from roughly 0.3% to over 1.5% annually depending on factors like the borrower's credit score, the loan-to-value ratio, and the loan term. This annual cost is usually divided into monthly installments added to the regular mortgage payment. A borrower with a smaller down payment and lower credit score will generally pay more for PMI than one with a larger down payment and stronger credit, since a higher LTV and weaker credit both represent more risk to the insurer.
Ways PMI Can Be Paid
While monthly PMI added to the mortgage payment is the most common structure, some lenders offer alternative arrangements, including a single upfront premium paid at closing, a combination of upfront and reduced monthly premiums, or lender-paid mortgage insurance, where the cost is built into a slightly higher interest rate rather than charged as a separate line item. Each structure has different tradeoffs regarding upfront cost versus long-term expense, and it's generally worth understanding which structure a specific loan offer uses.
How to Remove PMI
Under the Homeowners Protection Act, borrowers generally have the right to request PMI cancellation once the loan balance reaches 80% of the home's original value, and lenders are typically required to automatically terminate PMI once the balance reaches 78% of the original value, assuming the borrower is current on payments. Reaching these thresholds can happen through a combination of regular principal payments and, in some cases, home value appreciation, though lenders generally require a new appraisal to use current value rather than original value for an early removal request. Homeowners looking to speed up equity growth might also consider making extra principal payments, which can be modeled using an amortization schedule calculator to see how additional payments shift the PMI removal timeline.
Refinancing into a new loan once enough equity has been built is another path to eliminating PMI, discussed further in When Does It Make Sense to Refinance a Mortgage? and Rate-and-Term Refinance: How It Works.
PMI vs. FHA Mortgage Insurance Premium (MIP)
It's important not to confuse conventional PMI with the mortgage insurance premium (MIP) charged on FHA loans, which follows different rules. FHA's MIP often lasts for the life of the loan if the down payment was below 10%, regardless of how much equity is later built, unlike conventional PMI, which can generally be removed once sufficient equity exists. This is one of the key differences between conventional and FHA financing, discussed in FHA Loans: A Complete Guide for First-Time Buyers and compared more broadly in Conventional Loans Explained: Rates & Requirements.
Avoiding PMI Altogether
The most straightforward way to avoid PMI on a conventional loan is putting down a full 20%, which keeps the loan-to-value ratio at or below the threshold most lenders use. Some borrowers also use a "piggyback" loan structure, combining a first mortgage with a smaller second loan to avoid crossing the 80% LTV threshold on the primary loan, though this approach comes with its own costs and complexity worth evaluating carefully. VA loans, available to eligible veterans and service members, don't require PMI at all, which is one of their key advantages; see VA Loans: Benefits and Eligibility for Veterans.
Factoring PMI Into the Homebuying Decision
Because PMI adds to the monthly cost of a mortgage, it's worth factoring into any comparison of loan options and down payment sizes. Reviewing typical down payment thresholds across loan types in Down Payment Requirements by Loan Type and running various down payment scenarios through a mortgage payment calculator can help clarify how PMI affects the true monthly cost of buying with less than 20% down.