Private Mortgage Insurance – What Homebuyers Should Know

Learn how private mortgage insurance (PMI) impacts your homebuying budget, monthly payments, and long-term costs—and how to avoid or cancel it effectively.

Understanding Private Mortgage Insurance (PMI)

Private Mortgage Insurance, commonly referred to as PMI, is a type of insurance that protects the lender—not the borrower—in the event the borrower defaults on a conventional home loan. For many homebuyers, especially first-time buyers, PMI becomes a requirement when making a down payment of less than 20% of the home’s purchase price.

While PMI makes homeownership accessible by allowing for a lower upfront cost, it also introduces an additional monthly expense that can impact your financial planning. Understanding how PMI works, how much it costs, and how to manage or eliminate it can save you thousands of dollars over the life of your loan.

When Is PMI Required?

PMI is typically required on conventional loans when your loan-to-value (LTV) ratio exceeds 80%, meaning you’ve put down less than 20% on your home. This is different from government-backed loans like FHA or VA loans, which have their own forms of mortgage insurance or funding fees.

PMI Triggers:

• Down payment less than 20%

• Refinancing with less than 20% equity

• Lender policies on high-risk borrowers

Even if you are a financially strong borrower, lenders often require PMI simply because your equity stake is below the desired threshold.

Types of PMI

PMI is not one-size-fits-all. There are several types, each with different payment structures and implications for your budget.

Borrower-Paid Mortgage Insurance (BPMI)

The most common type, BPMI, is paid monthly as part of your mortgage payment. It can usually be canceled once your loan balance reaches 78% of the home’s original value.

Lender-Paid Mortgage Insurance (LPMI)

In this case, the lender pays the PMI premium but passes the cost onto you through a higher interest rate. LPMI cannot be canceled, so you’re stuck with the higher rate for the life of the loan unless you refinance.

Single-Premium PMI

This requires a one-time upfront payment either at closing or financed into the mortgage. This can be cost-effective if you plan to stay in the home long-term but risky if you sell or refinance early.

Split-Premium PMI

A hybrid option where you pay a portion upfront and the rest monthly. It’s useful for reducing your monthly payments without committing to a full upfront premium.

How Much Does PMI Cost?

PMI typically costs between 0.3% to 1.5% of the original loan amount annually, divided into monthly payments. The exact amount depends on:

• Your credit score

• Loan-to-value ratio

• Loan amount

• Type of PMI

For example, on a $300,000 loan, PMI could range from $900 to $4,500 per year—or $75 to $375 monthly.

Impact of PMI on Your Mortgage Payment

While PMI can help you get into a home sooner, it does add a non-negligible cost to your monthly budget. Here’s how it can affect a mortgage payment:

Always factor PMI into your monthly affordability calculations before making an offer on a home.

How to Avoid PMI

There are a few strategies you can use to avoid PMI entirely:

Make a 20% Down Payment

The most straightforward option is to put at least 20% down. Not only does this remove the PMI requirement, but it also reduces your loan balance, resulting in lower monthly payments and interest costs.

Use a Piggyback Loan

Also called an 80-10-10 loan, this method involves taking out two loans:

• 80% first mortgage

• 10% second mortgage

• 10% down payment

This structure avoids PMI but does come with the complexity of managing two loans and possibly higher interest rates on the second mortgage.

Look for Lender-Paid PMI Offers

Some lenders offer programs that waive PMI for borrowers with high credit scores or strong financial profiles. However, the tradeoff is often a higher interest rate.

Canceling PMI

Once you have built enough equity in your home, you can request to cancel your PMI or it may automatically terminate.

When You Can Cancel PMI:

• Your mortgage balance drops to 80% of the home’s original value (based on your request).

• It automatically cancels at 78% by federal law.

• You’ve reached the midpoint of the loan term (e.g., year 15 of a 30-year loan), even if you haven’t hit 78%.

Steps to Cancel:

1. Contact your lender with a formal written request.

2. Verify your home value—you may need an appraisal.

3. Maintain good payment history—late payments can disqualify you from canceling PMI.

4. Show no other liens on the home.

Proactive homeowners can often cancel PMI years earlier than the automatic termination date, especially if home values rise.

PMI on Refinanced Loans

If you’re refinancing and have less than 20% equity, PMI may still apply to the new loan. However, if your home has appreciated since your original purchase, refinancing could eliminate PMI altogether if your new LTV ratio is under 80%.

Tax Considerations

PMI premiums were tax-deductible for certain income levels, but this has fluctuated with recent changes to the tax code. Currently, it may not be deductible, so consult a tax advisor to understand its impact on your tax liability.

Pros and Cons of PMI

Pros:

• Enables homeownership with less upfront cash

• Helps first-time buyers enter the market sooner

• Can be temporary if canceled or refinanced later

Cons:

• Adds to monthly housing expenses

• Does not benefit the borrower directly

• May be hard to cancel depending on loan terms

Strategies for Managing PMI Effectively

• Improve your credit score before applying for a mortgage to qualify for lower PMI rates.

• Track your home equity growth regularly to identify cancellation opportunities.

• Refinance strategically if your home value rises.

• Weigh all options including split-premium or upfront PMI when comparing loan offers.

Final Thoughts

Private Mortgage Insurance can be a useful financial tool for getting into a home without a massive down payment, but it’s important to approach it with a strategic mindset. By understanding how PMI works, knowing how and when it can be canceled, and exploring alternatives, you can minimize its impact on your personal finances. Thoughtful planning today can save you thousands tomorrow—and move you toward true homeownership faster.