What Is PMI? How Private Mortgage Insurance Works and How to Avoid It

Private mortgage insurance — PMI — is one of the least understood costs of buying a home. Many buyers are blindsided by it at closing, adding $100-$300 or more to their monthly payment. Here's exactly what PMI is, when you have to pay it, and the best ways to avoid it or get rid of it.

What Is PMI?

PMI is insurance that protects your lender — not you — if you stop making mortgage payments. It's required on conventional loans when your down payment is less than 20% of the home's purchase price. The lender requires it because loans with smaller down payments carry higher default risk.

Despite its name, PMI doesn't benefit the borrower at all. It's pure cost. You pay the premiums, but the insurance company pays the lender if you default. Think of it as the price of borrowing with less than 20% down.

How Much Does PMI Cost?

PMI typically costs 0.5%–1.5% of your loan amount per year, depending on your credit score, loan size, and down payment percentage. On a $300,000 loan, that's $1,500–$4,500 per year — or $125–$375 per month. The lower your down payment and credit score, the higher your PMI rate.

• 10% down + excellent credit: ~0.5% PMI rate
• 10% down + good credit: ~0.7% PMI rate
• 5% down + good credit: ~0.9% PMI rate
• 3% down + average credit: ~1.2% PMI rate
• 3% down + lower credit: ~1.5%+ PMI rate

How to Avoid PMI

Put 20% Down

The most straightforward solution. Save up 20% of the purchase price before buying. Yes, it takes longer — but you'll have a lower monthly payment, no PMI, and often a better interest rate.

Piggyback Loan (80-10-10)

Take out a first mortgage for 80% of the home price, a second mortgage (home equity loan) for 10%, and put 10% down. You avoid PMI because your first mortgage is only 80% LTV. The second mortgage will have a higher rate, but may still be cheaper than PMI overall.

Lender-Paid PMI (LPMI)

Some lenders offer to pay your PMI in exchange for a slightly higher interest rate. This rolls the PMI cost into your rate. It can make sense if you plan to sell before reaching 20% equity, but costs more over the long run since you can't cancel a higher interest rate.

How to Remove PMI

By federal law (Homeowners Protection Act), lenders must automatically cancel PMI when your loan balance reaches 78% of the original purchase price — based on your scheduled payments. But you can request cancellation earlier once you reach 80% LTV, either through payments or home value appreciation. Request in writing, and your lender may require a home appraisal.